With all that chronic Democratic-inspired overspending, you would think it's all the costs of government, but no. A lot of government costs aren't explicit but hidden. We can see analogous concepts in everyday life. For example, warehouse clubs (Sam's Club, Costco, etc.) require an annual membership fee (roughly $1/week). The membership fee is simply a high-margin recurring cash flow for the privilege of shopping, even if you don't make any shopping trips over the year in question. The membership is a mandate--you need the card in order to shop in the store. It's a real cost to the customer. A mandate does not necessarily bring a financial benefit to the regulating organization; for instance, some consulting organizations may require their current and prospective male employees to wear a suit and tie. This represents a real cost to the man whom must upgrade his wardrobe, even though the employer has no direct financial stake in men's clothing.
The government similarly imposes costs on taxpayers over and beyond taxes. For instance, tax laws have become so complex some taxpayers have to hire accountants. That is a real cost to the taxpayer, which is directly attributable to the government, even though the government doesn't require the hiring of one. It happens in a number of different ways. Over the past week, I emailed a good friend whom is an IT manager in Silicon Valley, and he was complaining about the amount of time he was having to spend dealing with Sarbanes-Oxley related reporting requirements (i.e., the government's heavy-handed response to businesses in the wake of Enron and similar corporate scandals). This was time not being spent on business-related priorities.
Health Insurance and Mandates: A Topical Example
Victoria Bunce and J.P. Wieske of CAHI, in their article "Health Insurance Mandates in the States 2009", distinguish three types of mandates or requirements: health care providers; benefits, and household (population). What raises cost of basic health care insurance are expansions of mandates: for example, a state adds personnel beyond doctors and hospitals, such as chiropractors and massage therapists; expensive benefits like in-vitro fertilization, dentist, mental health, and prescription drugs; and household extensions, e.g., adopted or non-custodial children or raising the upper-limit age of young adult dependents. Traditionally, states have been the primary regulators of health care, although we have seen federal scope creep, including certain insurance portability, mastectomy, mental health, substance abuse, and Michelle's Law (related to the dependency rights of college students). Other examples of regulatory cost-drivers include guaranteed issue and community rating.
The authors point out that the aggregate effect of multiple mandates can add 20 to 50% to the cost of basic health insurance; more importantly, the increase in cost has typical cost-benefit implications as healthier-risk (e.g., younger) adults opt out of health insurance. Dealing with issues where insurance companies are wary about having to serve high-risk patients below cost while losing the business of more profitable risk policyholders because of cost, a vicious circle, is what led Massachusetts Governor Mitt Romney, for instance, to a compromise solution requiring an insurance mandate for individuals and businesses.
Whereas the accumulation of mandates is more of a qualitative measure (because of differences in the implementation of mandates across states and varying costs among mandates), one can broadly distinguish between lighter and heavier regulated states; for example, the CAHI article lists Idaho with 13 and Rhode Island with 70. The following NCPA chart suggests a relationship between the degree of state regulation and health care insurance policy cost.
National Center for Policy Analysis (c) 2009
Small Business and Health Insurance
As described in earlier posts, tax-advantaged employer-supplied health care was introduced a workaround to government-imposed wage controls during WWII. This is a concept many American voters haven't grasped. Most people probably think of pay as their gross salary; they explicitly see deductions for payroll taxes, local/state/federal tax withholding or their own benefit co-payments, but they don't see the business side (e.g., unemployment insurance premiums, employer matches to payroll taxes, and employer contributions covering all or a large percentage of various benefits). In addition, workers may not explicitly see the fact that their health policy contributions are exempted from federal tax at their current tax bracket (up to 35% ). The key point is that businesses look at labor costs in terms of total compensation--including not only gross salary and employer share of payroll, unemployment and other taxes plus benefit subsidies. Democrats think by adding taxes/mandates on the employer side of compensation that employees will regard them as "free". But whether the government pays for the fertility treatments from taxes or requires individuals and businesses to cover them through mandates, either method results in lower disposable income; there's no such thing as a free lunch.
According to the Commonweath Fund, small companies pay 18% more in premiums, but there's more to the story than simply economy of scale. Roughly 27 million of 46 million uninsured are small business owners, their employees, and dependents. Almost 90% of large employers self-insure and are exempt from costly state regulations under ERISA, instead subject to a more limited set of federal mandates. Furthermore, large companies only pay about 10% in administrative costs versus up to 25% for small companies.
There have been attempts to pool small businesses. In the Congress, there have been attempts to pass Association Health Plans, which would have enabled ERISA-like self-insurance (opposed by pro-regulation liberals and the insurance industry). Senator Enzi (R-WY), a former shoe store owner, and Senator Ben Nelson (D-NE), a former state insurance commissioner, in the 109th Congress, attempted to mollify industry opposition by dropping self-insurance and instead proposing a "no-frills" basic healthcare mandate package, but that attempt also failed. (There was actuarial evidence that such a plan would raised the number of insured by a million working Americans while reducing premiums about $1000 per employee.) Neil deMause of Forbes Small Business, in an article called "Why Health Care Pools Haven't Worked", points out the pool concept on the state/local level has met with mixed success, in part because of a chicken-or-the-egg problem in terms of achieving the economy of scale necessary to attract favorable pricing by insurers, i.e., lower prices are needed to attract businesses to join the pool, but the pool can't offer lower prices without a critical mass of policyholders.
The Massachusetts Experiment in Health Care Reform
Massachusetts' health care reform attempts to address the vicious circle problem by requiring, in a manner similar to auto insurance, coverage: individual or business coverage. The tie-in of health care to business has been presented by certain Republicans (including former President Nixon and Massachusetts Governor Mitt Romney) or conservative Democrats as an alternative to single-payer government-run health. Technically, it doesn't quite amount to universal coverage, because there are financial hardship exemptions and there are fines for businesses or individuals whom do not comply. Businesses with more than 10 employees are fined up to $295 for employees not covered under an acceptable employer plan (even employees whom are carried under other policies, e.g., a working spouse's or parent's plan). Individuals could face fines up to roughly $1068. (Note that these fines, up to $1400 per worker, don't pay for a dime of health care for the person.)
The results have been less than stellar. Massachusetts, which started with roughly 12% of the population uninsured (maybe half the percentage, say, in Texas), provides insurance subsidies for qualifying households up to roughly $60,000/year in income and found the demand for subsidies overwhelming the state's budget (some 85% higher than projected). This year Massachusetts is mandating prescription drug benefits, state insurers are accordingly raising premiums, and the state is responding to the shortfall by excluding certain groups (e.g., legal immigrants) and slashing payments to providers. The providers are responding by refusing to accept new patients; in a state with the highest physician/patient ratio in the nation, wait times to see a specialist in Boston take about 50 days (vs. a 21-day national urban average), and some patients are facing wait times of up to a year to schedule a routine physical.
Final Thoughts
I think of mandates in a manner similar to the earlier decade financial scandals where certain companies swept troubled assets off their books or sold products at good prices in a tough market to a captive buyer; taxes, on the other hand, are visible to each worker whom reviews his or her employment stub or prepares relevant tax returns.
Mandates get added primarily at the initiative of highly-motivated, politically connected special-interest groups; in many cases, the effect of an individual mandate may be minor (e.g., <1%), but the aggregate effect is material. We need some reforms to control for the inherent risk of corruption and to respond on behalf of the taxpayers when those mandate nickels and dimes add up to increasingly unaffordable health insurance and unsustainable budget deficits. In the meanwhile, we should draw some lessons from the Massachusetts experiment. Romney make a key mistake in accepting the status quo as a starting point; the first step would have been to analyze why Massachusetts' health care premiums were significantly higher than the nationwide average and address whatever those issues were, e.g., too many mandates, barriers to competitor entry, higher eligibility limits for state assistance, malpractice insurance rates, etc. There should have been more focus on insurance to handle catastrophic costs and more vesting of the individual in minimizing his or her own health costs instead of regarding medical goods and services as "free".
