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Good Intentions, Unintended Consequences

When it comes to making good health care policy, good intentions are not enough.

That is something President Obama and lawmakers should remember as they meet today to discuss health care reform. And, if they find that maxim slipping their minds, they need only look to New York for a reminder.

In 1992 then-Gov. Mario Cuomo signed a state law regulating the health insurance industry which he predicted would be a “forerunner of what we'll [be] seeing nationally.” Instead, New York ended up as “sort of a case study of what not to do,” in the words of Mark Scherzer, a consumer advocate who helped lead the fight for the legislation.

The New York law prevented insurers from denying coverage to any individual based on pre-existing health conditions, a common practice in the insurance industry. Insurers may still refuse to pay for treatment of the pre-existing condition itself, but only for one year after coverage begins and only if the individual received treatment for the condition in the six months before obtaining coverage.

The law also included a "pure community rating" requirement that prohibits insurers from charging different rates based on customers’ age or health.

These two provisions were intended to put an end to the tide of heart-wrenching stories of people unable to get coverage because of health problems. New York was tired of seeing those who needed coverage the most being turned away.

But, even as more sick and elderly New Yorkers got coverage, overall coverage rates declined. When insurance companies were required to welcome customers with greater health needs, their costs increased. Because of the pure community rating requirement, they could not simply pass these higher costs on to their most expensive customers, but instead had to raise premiums for everyone.

With these higher premiums in place, many young, healthy people decided that buying insurance was no longer worthwhile. The short waiting period for coverage of pre-existing conditions made it possible for them to simply wait until they needed insurance before purchasing it. This loss of the healthier segment of the population caused insurance premiums to increase even further by pushing up the percentage of the insured likely to have expensive claims.

The cycle of rising premiums and declining enrollment rates for healthier individuals drove New York premiums to the highest level in the nation, with individual health coverage costing about $9,000 a year on average. The state’s Insurance Department says that average premiums have nearly tripled since 2001. Nearly one in seven New Yorkers has no coverage.

Several other states passed similar laws around the same time as New York, but nearly all the others have been scaled back or abandoned. Yet Cuomo’s prediction that New York would be a forerunner for the nation may still come true.

In his newly released proposal for health care reform, President Obama says his plan “bans all insurance companies from denying insurance coverage because of a person’s pre-existing medical conditions.” Obama’s proposed solution to the resulting problems of increasing premiums and declining enrollment is simply to tell insurers that they can’t raise premiums and individuals that they can’t drop coverage.

The president’s plan would create a new Health Insurance Rate Authority that could veto insurance companies’ increases in premiums if it considered them to be “unjustified.” The decrees of the federal rate board could potentially override decisions by the 25 states that already grant their insurance commissioners the authority to oversee rate changes.

But this rate control by fiat will not work. The federal government may be able to tell insurers that they can’t sell insurance at the prices that would allow them to make money, but it can’t force them to continue to operate at a loss. If insurers are not allowed to write policies that make sense, they may simply stop issuing certain types of coverage altogether. When Kentucky and Washington implemented regulations similar to those in New York, insurers started pulling out of the states, forcing them to drop their new laws. The president’s proposals could spark a national exodus of insurance companies from the individual and small-group markets.

The president’s proposed coverage mandate for individuals is a necessary component of any broad-based reform, but it will not be enough to keep insurance costs — and the nation’s overall bill for health care — at manageable levels. Even if we make everyone who can afford insurance buy it, there will still be many people who simply cannot afford insurance. To keep everyone covered, we must subsidize coverage for large numbers of people. Under the president’s plan, most of those subsidies will come from Medicaid.

After a few years of transitional federal aid, a large portion of these new Medicaid costs will be passed on to states. Because we have not yet done anything to control the true costs of medical care, the size of the subsidy will likely continue to grow. So, while the federal budget hit from Obama’s proposals would be only about $950 billion over 10 years, the total cost to the country would be much greater. Obama is unwilling to acknowledge this.

This does not justify allowing people who can afford insurance to go without it, however. Because we do not allow hospital emergency rooms to turn away ill or injured patients, they already serve as a de facto type of insurance. Mandatory coverage makes people pay for the safety net that morality compels us to provide. Republicans who oppose mandatory insurance know this but are shedding crocodile tears over the supposed injustice of making people buy something they do not want to buy.

All of these problems stem from the simple desire to cover the uninsured, particularly those who are sick and cannot now get insurance. This is a noble objective, but, as the case of New York shows, good intentions do not always produce good results.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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