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A Prognosis on Mandates and Guarantees

"Experiments" in eight states provide pointers on how America might provide guaranteed health insurance.

Should the government require everyone to have health insurance? It's a question Sens. Barack Obama and Hillary Clinton have used to mark a defining difference between them in taking on the nation's biggest domestic issue. In reality, they almost completely agree.

Both Clinton and Obama reject a nationalized, single-payer health plan. They both believe, however, that insurers must accept everyone regardless of pre-existing conditions. Thought of as a right to buy insurance, or guaranteed issue, the law is something most Americans typically support, but experts say it creates unintended consequences.

"With guaranteed issue, some consumers may have an incentive to wait until they get sick to get coverage," said Robert Zirkelbach, spokesman for America's Health Insurance Plans, an industry trade group. "When that happens, it drives up costs for all consumers and healthy individuals have an incentive to leave the market."

Sen. John McCain, meanwhile, rejects either requiring insurers to provide coverage or forcing people to buy it. "That would be mandating what the free enterprise system does," he recently said. Instead, McCain's plan hinges on tax breaks and competition.

Obama says a so-called purchase mandate can wait. But it shouldn't wait too long, based on eight states that tried guaranteed issue without it. A September 2007 Milliman study, commissioned by AHIP, found that states watched an exodus of health insurers leave the market, premium rates rise and an overall increase in the number of uninsured. The study looked at states with versions of guaranteed issue and other market reforms since the 1990s (Kentucky, Maine, Massachusetts, New Hampshire, New Jersey, New York, Vermont and Washington).

"Every consumer who wants to purchase a plan should have an opportunity to buy one and not be denied coverage," said Kathleen Stoll, deputy executive director of Families USA, a leading health care consumer group. Like Obama, the group doesn't rule out a so-called individual mandate as long as insurance plans are affordable. "Guaranteed issue says you have the right to buy a plan, but it doesn't say how much it should cost."

Those who support individual mandates are by no means dominated by the insurance industry. Advocates include The Brookings Institution, The Urban Institute and The New America Foundation, where health care economist Len Nichols says major reform doesn't have to start with a mandate, but it needs to be included pretty early on.

Even more important, he adds: America's health care system needs to be more rational.

"If you impose guaranteed issue without a mandate, you put insurers at risk for adverse selection," Nichols said.

Young and healthy people tend to leave an insurance pool first, Nichols said. And it's those premium dollars that typically pay for the sick. "Insurers have to protect themselves. Protecting themselves from that risk is how they develop underwriting techniques," he said. "It's why they exclude people completely."

For purchase mandates to work along with guaranteed issue, health plans must first be made affordable. Where plans were priced two years ago, they were just within financial reach of an estimated 20 percent, according to the Urban Institute, of the 47 million uninsured Americans. Affordability to businesses is another question. With employer-sponsored coverage eroding faster than an Arctic glacier, an aggressive employer-mandate is all but out of the question.

But what does affordable mean in states such as Washington, where insurers last year used guaranteed issue to justify huge rate increases? In a year that some individual rates rose by more than 40 percent, Washington insurers amassed a record $1.4 billion surplus. Lawmakers responded in March with a bill restoring the state's authority to regulate individual rates, in effect opening the door to price controls, but they did not impose a mandate.

"People felt they had been really misled by the insurance companies," said Washington State Sen. Karen Keiser. "They increased premiums by such a startling amount that it gave us much better traction."

Keiser isn't convinced that Washington's law requiring insurers to reject less than 8 percent of individual applicants has caused health care turmoil in her state. "I'm not persuaded," she said. "These premium increases are not limited to our state alone."

"It's getting worse," said Ron Denison, an Oregon and Washington insurance agent for 20 years. "It's not getting any better." In Oregon, rates are slightly better, but Denison has seen the levels of individual rejections rise through the roof, now up to roughly 30 percent of all applicants.

"If you're on high blood pressure medicine or depression medicine, they'll reject you for insurance," Denison said. "If you have asthma, even if you take an inhaler, they'll reject. You could have had knee surgery four years ago and not have a thing wrong with your knee since then, and they'll reject you still."

In 2006, Massachusetts became the first and only state to impose an individual health insurance mandate. It came with an employer mandate, government subsidies and other cost-saving measures. Even though they made a few mistakes, Nichols said more attention should be paid on what Massachusetts got right. "They got all the big things right," he said, "starting with agreeing to cover everyone."

While the presidential candidates debated over the winter, California state lawmakers struggled with Gov. Arnold Schwarzenegger over the same issue. The Democrat-led legislature stood firm and passed a bill with guaranteed issue and an employer mandate, among other reforms, but absent what Schwarzenegger insisted: an individual mandate. So the governor vetoed.

Insurers by and large prefer "high-risk pools" to guaranteed issue, administered in a majority of states, where those rejected for coverage are guaranteed access to an alternative plan often managed by the state and administered by private insurers. But the plans are expensive; and they have done little to stem the rising costs of health insurance. California's high-risk pool, known as the Major Risk Medical Insurance Program, covers just 8,100 people, failing to take even a chip out of the state's 6.6 million uninsured.

So what's the solution? In the simplest terms, Nichols and other reformers say, we must buy smarter by instituting incentives that emphasize prevention and medical treatments with the highest value.

"We won't say ‘no,' to providing care," Nichols said. "We will just make the co-pay higher. We have to stop collectively financing low-value care. I don't think that's rationing. Rationing is denying known efficacious care. We ration today by income. Being rational doesn't mean rationing. At the same time, we have to work really hard at earning trust."