Thank you, Mr. Chairman, and members of the committee for inviting me to testify today as you address the challenge of why, despite years of effort to try to reverse the trends, more and more Americans are without health insurance.
My name is Grace-Marie Arnett, and I am president of the Galen Institute, a not-for-profit health and tax policy research organization based in Alexandria, Virginia. The Galen Institute was founded in 1995 to promote a more informed public debate over individual freedom, consumer choice, competition, and diversity in the health sector. The Galen Institute also facilitates the work of the Health Policy Consensus Group, which is composed of nearly 20 health policy experts from the major free-market think tanks, whose work I will discuss later in my testimony.
For decades, policy makers at all levels of government have been searching for ways to help Americans gain greater access to affordable health care. You and your colleagues in Washington and lawmakers in the states have spent untold thousands of hours trying to achieve that goal.
It is frustrating to you and to virtually all Americans that, despite these efforts and especially during a period of strong and sustained economic growth, the number and percentage of Americans without health insurance continues to rise. In 1987, there were 32 million Americans under age 65 without health insurance at some point during the year. A decade later, the number has risen to more than 43 million or 16.1% uninsured.
At the state level, thousands of new rules and regulations have been passed with the intent of forcing health insurers to offer coverage that contained good benefits, at reasonable costs, and with protections for policyholders. Additional insurance regulations and mandates recently have been passed at the federal level, as you know, and even more are being debated. However, the rule that governs the practice of medicine should also govern lawmakers in addressing health reform issues: First, do no harm.
The data show that these laws have the effect of increasing the cost of health insurance and are driving up the number of uninsured.
Insurance costs and the uninsured
People who are on the tightest budgets must make the hardest choices in deciding how to allocate their resources. After paying the rent or the mortgage and putting food on the table, millions of Americans simply don’t have enough money left to buy health insurance. Some are faced with the choice between sending their children to a good, safe school or providing the family with the security of health insurance. These are terribly difficult choices, but we see from the numbers the choice that more and more Americans are making.
When asked by a Kaiser/Commonwealth Fund survey, the majority of Americans cite cost as their reason for not having health insurance.
Over the last decade, health insurance costs have increased much faster than overall consumer prices. The General Accounting Office reported in 1997 that the average annual premium for employment-based family health insurance coverage increased by 111%, from $2,530 in 1988 to $5,349 by 1996. During this same period, overall consumer prices rose by 33%. Now, after several years of leveling off, health insurance premiums are on the rise again. This does not bode well for the uninsured.
The GAO concluded that the continued erosion of health insurance coverage is directly linked to cost pressures.
The Congressional Budget Office estimates that every one percent increase in the cost of health insurance throws 200,000 more Americans off the insurance rolls. The result: Those who can least afford the inevitable premium increases will lose their health insurance.
The uninsured are disproportionately young, minority, lower income, and either work for small companies or are their dependents. Hispanics and minorities are the most likely to be uninsured. Among working-age Americans, 14% of whites, 24% of blacks, and 38% of Hispanics are uninsured. The uninsured numbers are even higher for lower-income minority group members, reaching 52% for Hispanic families whose incomes are below the federal poverty level.
The research that I have done, which is validated by numerous other experts, has convinced me that there is a causal connection: the growing burden of mandates and regulation in the health sector leads to higher costs for health insurance which, in turn, drives more people into the ranks of the uninsured.
Mandates and the uninsured
The link between insurance mandates and the uninsured has been established by numerous researchers.
- Using data from 1989 to 1994, Sloan and Conover found that the higher the number of coverage requirements placed on plans, the higher the probability that an individual would be uninsured, and the lower the probability that people would have any private health insurance coverage, including group coverage. After more than 100,000 observations, they conclusively demonstrated that the probability an individual will be uninsured increases with each mandate imposed by government.
- Gail A. Jensen of Wayne State University and Michael Morrisey of the University of Alabama-Birmingham found that as many as one in four Americans lack health insurance because of benefit mandates. Each additional mandate significantly lowers the probability that a firm or an individual will have health insurance.
- Professor William S. Custer of Georgia State University found that state guaranteed issue requirements, coupled with either community rating or rate bands in the small group insurance market, increase the probability that a person will be uninsured by nearly 29%. These laws hit small firms and individuals purchasing insurance in the open market the hardest.
The number of mandates has increased 25-fold over the last quarter century, with more than 1,000 state mandated benefit laws on the books today. Most are an attempt by lawmakers to correct inefficiencies or inequitable practices in the market. Unfortunately, they are having the unintended effect of increasing the ranks of the uninsured.
Mandates and insurance regulations do not show up on the federal budget ledger, but they do show up in the paychecks and in loss of coverage by individual workers. Jensen and Morrisey say, “Mandates are not free. They are paid for by workers and their dependents, who receive lower wages or lose coverage altogether.”
In a study, conducted in 1989 even before the explosion of state mandated benefit laws in the 1990s, Acs et al found that mandates significantly raised premium costs. Even then, insurance was found to be 4 to 13 percent more expensive as a direct result of benefit laws.
Each mandates may increase costs only a percentage or two, but others add much more. Every one of these benefit mandates can be justified individually, and each has a constituency that can and does argue passionately for its merit. But cumulatively, they are condemning more and more people to being without health coverage.
Hitting the most vulnerable the hardest
Small businesses and individuals attempting to purchase health insurance are hit with the full force of these mandates and insurance regulations. The small group and individual insurance markets have become fragile and expensive as a result. Most large companies avoid benefit mandates and state insurance regulation laws because they are protected by ERISA, the Employee Retirement Income Security Act of 1974 that allows companies that self-insure to escape the reach of these state insurance laws and regulations. Few small business can afford to self insure and are therefore subject to all of the mandates and regulations imposed by the states.
Surveys conducted by the National Federation of Independent Business show that the great majority of small business owners would like to offer health insurance, but say high costs make it prohibitive. About 40% of businesses with fewer than 50 workers do not offer health insurance. A person working for a company with fewer than 10 employees is three times more likely to be without health insurance than someone working for a company with more than 1,000 employees.
Even small companies that do offer insurance often must make the choice between keeping their business going and offering health benefits. Many walk the line ? offering insurance but requiring employees to pay a larger share of the premiums. Unfortunately, an increasing number of people offered health insurance through their jobs are declining coverage, again citing costs as the primary reason.
For this and other reasons, the number of people with private health insurance has been declining for nearly two decades. Since 1980, the number of people with private health insurance coverage obtained either through the workplace or purchased individually has been declining, from 79.5% in 1980 to 70.5% in 1995.
State insurance regulations and the uninsured
The Galen Institute conducted a study last year, which was published by The Heritage Foundation, to determine the effect of state efforts to regulate their health insurance markets and shape coverage to help their citizens get affordable health insurance coverage.
Using GAO studies, we determined that between 1990 and 1994, 16 states were most aggressive in passing laws regulating health insurance. By 1996, these 16 states were seeing their uninsured populations grow an average of EIGHT times faster than the 34 states that passed less comprehensive regulations. Compare this to 1990, before the blizzard of health-care reform legislation began, when the two groups of states had nearly equal rates of growth in their uninsured populations.
Could the increase in the number of uninsured in these 16 states be caused by something other than regulation? Not likely. The regulating states had employment and income characteristics similar to the rest of the nation. Their only distinguishing feature was the passage of these sweeping health insurance regulations.
One of the biggest regulators was Kentucky. “In spite of good intentions and noble purpose, it didn’t work … The entire cost of the system went up,” Gov. Paul Patton said last year. Kentucky citizens paid the price: 107,500 fewer citizens, out of a population of 3.4 million, had health insurance in 1996 than in 1990. “In my opinion, most of the general assembly believes that we in Kentucky have experimented enough for the time being,” Patton said.
In addition to Kentucky, the other states that imposed the most aggressive regulations were Idaho, Iowa, Louisiana, Maine, Minnesota, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Utah, Vermont and Washington. Their new laws included: mandates on insurers to sell policies to anyone who applies and agrees to pay the premium – even if they wait to buy insurance until they are already sick (guaranteed issue); prohibitions on excluding coverage for some medical conditions (pre-existing condition exclusions); and requirements that insurers charge the same price to everyone in a community, regardless of the differences in risk posed by individuals (community rating); plus others.
The findings from our study have been validated in part by other studies, including the Urban Institute.
Recent federal legislation ? the Health Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997 ? have imposed at the federal level some of the insurance rules that had been enacted by the states, including guaranteed renewal and some of the most common coverage mandates, making it difficult to do a differential study now.
However even now, 11 of the 16 states we studied still has a rising number of uninsured, and for all but two, the growth in their insured populations is under 1%.
The fact that regulation has failed at the state level does not mean federal action is unneeded. But in the battle over Patient Protection legislation, the uninsured are being shoved aside in favor of the small percentage of those who have health insurance but are unhappy with it. Instead of helping the 43 million Americans with no health insurance, the data strongly suggest that patients’ rights legislation will hurt them by driving up the cost of coverage and throwing even more people off the insurance rolls.
More regulation is not the answer
The health sector is the most heavily regulated industry of the American economy. In every other industry, Americans recognize that regulation drives up prices, restricts innovation, dries up competition, and forces businesses to cater to regulators and not consumers. That is exactly what is happening in the health sector.
These data show that American citizens are paying a high price for the mistakes of well-intended but flawed legislation that has backfired in its intent. A poll released last year by the Charlton Research Company showed that 66% of respondents said they thought health care is regulated enough. Only 25% said more regulation was the answer, and the majority of them changed their minds if the regulations would increase government bureaucracy or health care costs.
A fresh approach to energize the free market
As costs and the number of uninsured continue to rise, a different approach clearly is needed. In a forthcoming book, entitled Empowering Health Care Consumers through Tax Reform, the Health Policy Consensus Group explores the intersection of health and tax policy for solutions. This group of economists and other health policy advisers, business group and union representatives, physicians, and political leaders describes the distortions to the health care system caused by a 50-year-old provision in the tax code.
The central, structural defect impacting the market for private health insurance is the discriminatory tax treatment of health insurance. To begin to stem the flow of problems that wind up on their doorsteps, legislators can begin by providing broader access to health insurance through tax credits and other fixed incentives for individuals.
In today’s information age economy, an increasing number of people work part-time, are contract workers, or are starting their own businesses. These are the people who are disproportionately likely to be uninsured because the system is working against them.
The federal tax code heavily favors workers fortunate enough to get their health insurance through the workplace. That is because workers do not pay taxes on the part of their compensation package that they receive in the form of health benefits as long as their employer purchases the policy for them. This generous subsidy, worth an estimated $111 billion a year, is the cornerstone of the system in the United States that ties private health insurance to the workplace.
However, this tax provision distorts the efficiency of the health care market in a number of ways: (1) It restricts employees’ choices to the selection the employer offers; (2) It undermines cost consciousness by hiding the true cost of insurance and medical care from employees; (3) Because the full cost of health insurance is not visible to employees, it artificially supports increased demand for medical services and more costly insurance; (4) As a result, inefficient health care delivery is subsidized at the expense of efficient delivery; (5) Cash wages are suppressed; (6) Many employees with job-based coverage are frustrated because they have little choice and control over their policies and their access to medical services; (7) The self-employed, the unemployed, and those whose employers do not offer health insurance are discriminated against because they receive a much less generous subsidy, if any at all, when they purchase health insurance on their own.
Trapped in the Galen Gap
The Galen logo is a conceptual depiction of a central problem in the health sector that affects Americans under age 65. The vertical axis of the graph in the logo represents the value of the taxpayer-supported health benefits a given individual may receive. The horizontal axis represents the individual’s income.
Those with the very lowest incomes are most likely to qualify for taxpayer-supported health programs, especially Medicaid. But as an individual moves up the income scale, the likelihood of qualifying for public programs to receive health benefits drops off. Working Americans with incomes of less than $25,000 are most likely to be uninsured and are caught in the troth, which we call the “Galen Gap.” They earn too much to qualify for public programs but are less likely to have the good jobs that provide health insurance as a tax-free benefit.
As people move up the income scale, they are much more likely to have both the good jobs and the higher incomes to qualify for the generous tax subsidy for employment-based health insurance, worth an estimated $111 billion this year.
John Sheils of the Lewin Group estimates that families making less than $15,000 a year reap just $71 in tax benefits from job-based health insurance while families making $100,000 or more get a $2,357 in tax break for the purchase of health insurance. This is a highly regressive subsidy that drives many of the problems involving cost and access in the health sector today.
The great majority of the uninsured are in the “Galen Gap.” Some have been trying to fill this gap from the left by creating and expanding government programs, such as the $48 billion State Children’s Health Insurance Program and working to expand Medicare to middle-aged Americans.
We believe real solutions will come from exploring solutions on the right side of the chart ? by focusing on tax policy. We believe that many more people would have access to medical services and health insurance that would be more affordable and more innovative if the tax treatment of health insurance were reformed.
Federal legislators can begin building incentives for a better system and also undo some of the damage done by federal and state regulation by providing targeted tax credits to the uninsured to purchase their own health insurance.
States can do their part by taking advantage of an immediate opportunity to provide tax credits and vouchers for uninsured children and their families through the Children’s Health Insurance Program.
There is a need to provide alternative grouping mechanisms for individuals in purchasing health insurance to give them an opportunity to take advantage of group rates. A number of provisions are being debated today, such as HealthMarts and Association Health Plans, designed to address the supply side of the equation.
Today, consumers are denied the choice of health plans best suited to their needs when mandates force plans to provide an array of benefits designed more to please lobbyists than consumers. Mandates also drive up health care costs making insurance more costly for individuals and families. Congress and the states would be well advised to put a moratorium on more mandates until the cost and implications can be fully explored.
The results examined in these studies show that regulation at the state and federal level is counterproductive in responding to the challenge of increasing access to health insurance in the individual and private health insurance market. If health care access and affordability are genuine goals, a far better approach would be to empower individuals and families to make health care choices that suit their own needs, restore the independence and integrity of the medical profession, and force the health care industry and insurance companies to compete for consumers’ dollars. The health care delivery system at all levels should be accountable directly to the individuals and families being served.
Thank you for the opportunity to present this testimony, and I would be happy to answer questions or provide additional information.
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Grace-Marie Arnett is president of the Galen Institute, a public policy research organization based in Alexandria, Virginia. She is the editor of Empowering Health Care Consumers through Tax Reform, published in 1999 by the University of Michigan Press.