The Massachusetts Health Mess

Originally Posted At The Wall Street Journal
July 11, 2009

In a rational world, the prognosis for ObamaCare would wait on the evidence in Massachusetts, given that the commonwealth's 2006 program closely resembles what Democrats are trying to do in Washington. If the results were widely known, it might be dead on arrival.

The Massachusetts law, which was championed by former GOP Governor Mitt Romney, imposed an individual mandate, requiring nearly all residents to buy health insurance or else pay a penalty. (The exceptions are those who qualify for the state's public program.) This was supposed to cover everybody and save money too. We've written before about how costs have exploded, but it also turns out that consumers have other ideas.

For 15 years Massachusetts has also imposed mandates known as guaranteed issue and community rating -- meaning that insurers must cover anyone who applies, regardless of health or pre-existing conditions, and also charge everyone the same premium (or close to it). Yet these mandates allow people to wait until they're sick, or just before they're about to incur major medical expenses, to buy insurance. This drives up costs for everyone else, which helps explain why small-group coverage in Massachusetts is so much more expensive than in most of the country. Mr. Romney argued -- as Democrats are arguing now -- that the individual mandate would make that problem disappear, since everyone is always supposed to be covered.

Well, the returns are rolling in, and a useful case study comes from the community-based health plan Harvard-Pilgrim. CEO Charlie Baker reports that his company has seen an "astonishing" uptick in people buying coverage for a few months at a time, running up high medical bills, and then dumping the policy after treatment is completed and paid for. Harvard-Pilgrim estimates that between April 2008 and March 2009, about 40% of its new enrollees stayed with it for fewer than five months and on average incurred about $2,400 per person in monthly medical expenses. That's about 600% higher than Harvard-Pilgrim would have otherwise expected.

The individual mandate penalty for not having coverage is only about $900, so people seem to be gaming the Massachusetts system. "This is a problem," Mr. Baker writes on his blog, in the understatement of the year. "It is raising the prices paid by individuals and small businesses who are doing the right thing by purchasing twelve months of health insurance, and it's turning the whole notion of shared responsibility on its ear."

Mr. Baker is right, though he underestimates the extent to which it is rational for people to do this, considering the government-mandated incentives. To one degree or another all insurance pools require the younger and healthier to subsidize the older and sicker, though part of the risk-sharing bargain is the hedge against unanticipated or future health problems -- i.e., true insurance. The combination of guaranteed issue and community rating actively encourages parts of the healthier population to forgo coverage and thus blow up voluntary risk pools. No doubt our politicians will conclude that the solution is to raise the penalty for going uninsured, though it would be easier and more rational to let insurance markets function without mandates.

For many Democrats, none of this is really a surprise, or even important. Their Rube Goldberg rules are meant to transfer the costs of health care away from individuals and onto someone else -- private companies like Harvard-Pilgrim in the short term, and over time onto taxpayers. Why lobbyist Karen Ignagni is still putting the health-insurance industry's head on the Washington chopping block is a mystery for the ages.

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