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Colorado Amendment 63, risk pools, & health care costs

A July 30 statement from a group calling itself “Colorado Deserves Better” said that Colorado Amendment 63 (Health Care Choice) “would isolate Colorado from health care costs savings by shrinking the risk pool in Colorado.”  This is unlikely, and even so, it’s unethical.

Even if larger risk pools result in cost savings (for whom?), this no justification for mandatory health plans. How about legislation mandating that everyone who buys an iPhone also buy the extended warranty? A warranty is a type of insurance, after all. Mandatory warranties would expands the risk pool, and hence lower the costs of the warranty. But this exploits the people who prefer not to buy the warranty and insure against iPhone-related risks in other ways.

You might counter this by saying that a health plan is different, and that the uninsured are free-riders who increase everyone else’s health plan premiums when they don’t pay. As I’ve written before, this cost-shift from the uninsured is tiny, especially when compared to how much Medicaid and Medicare increase premiums.

Even if you think forcing people into a risk pool is OK, would this really result in health care cost savings?  Massachusetts is the only state that mandates the purchase of a health plan, but where are the cost savings?  The most affordable plans available on the exchange cost almost three times more than those available in Fort Collins. The Boston Globe reports that the premiums in Massachusetts are the highest in the country and emergency room visits and costs have increased.

One reason is that when politicians mandate that you buy a health plan, they get to define the minimum benefits a legal plan can have. Massachusetts has done this, and national health control legislation (HR 3590) defined them section 1302(a).  These can make many employer-based plans illegal.

With mandatory health plans, politicians pile on costly mandated benefits that increase premiums. Such “benefits” further distort insurance into a prepaid health plan, where customers are insulated from the true costs of treatment. Hence, they are not concerned with how much treatment costs or about more affordable alternatives. Since the patients isn’t paying, physicians have incentive to exaggerate diagnoses such that third-party payers will finance expensive treatment.

Health care prices stay in check when patients are the paying customers.  Examples include abortion (whatever your position on this), Lasik, and cosmetic surgery. When patients pay out of pocket, health care innovation benefits them and results in cost savings.

But mandatory health plans requires comprehensive plans such that the patient is rarely the customer, insurers are. Mandatory insurance provisions such as the one in health control legislation (HR 3590) threatens high-deductible HSA-qualified policies, even though such policies can reign in health care costs. The American Academy of Actuaries reported that such “plans can produce significant (even substantial) savings without adversely affecting member health status.”

If you want to expand risk pools, then push politicians to allow Coloradans to buy insurance available in other states, and those in other states to buy policies sold here. One study predicts that this would make insurance affordable for millions. This method of expanding risk pools doesn’t exploit people entering it. Rather than being forced, they choose to buy the product.

Update: Linda Gorman‘s article on direct-purchase insurance* mentions how well such insurance already pools risk:

[Health economists Mark] Pauly and [Bradley] Herring report that direct-purchase insureds who had medical expenses about 4 times that of other people enjoyed premiums that were only 1.6 times as high. People who buy a policy and become ill have a strong incentive to continue paying. This may explain why age and sex were generally better predictors of direct-purchase premiums than chronic conditions.11 Marquis et al. concur, reporting that the individual direct-purchase market is “an important source of long-term coverage for many who purchase it” and that “there is substantial pooling” that “increases over time because people who become sick can continue coverage without new underwriting.”12

* That is, you buy the insurance policy (or health plan) directly from the insurer, not through your employer.