24 January 2007

The Gold Plated Health Insurance Myth

One of the things that the President railed against was the tax benefits provided to those with "gold plated" health insurance. The claim is questionable. Health insurance is rarely expensive mostly because it has fewer excluded services. Other causes are behind most high premium health insurance plans.

About 80% of people with health insurance pay under the $15,000 limit for tax breaks he suggests for family insurance, and under the $7,500 limit for tax breaks he suggests for individual insurance. By definition, he calls those non-gold plated policies.

So, who has the more expensive policies that make up the other 20%?

1. Small businesses. A health insurance policy with the national average cost for family coverage of about $11,500 a year, covering what a Fortune 500 company or the federal government or a state government can get for that price, costs roughly $16,500 a year to secure for a small business group, and thus would be considered "gold plated" by the administration.

2. Old people in small businesses. Most states still permit premiums to be based on the age of the insured, at least, in small business group plans. If you are 55+ you pay far more for the same health insurance product than you do if you are under 25.

3. Self-insured plans that cover pregnancy. It is possible to buy a non-group health insurance plan separate from an employer plan. These plans are far less regulated than employer provided health insurance which is mandated to provide many coverages. Indeed, for a young adult this can save you heaps of money. The single biggest factor in the cost of a non-group health insurance plan is whether you elect to cover pregnancy or not. For an individual or family that includes a woman of child bearing years, roughly half of the cost of the policy is for maternity coverage. If you elect maternity coverage, the plan is as expensive or more so than a small business plan, if you opt out, and can't afford maternity health care as an uninsured person, you impose a burden on the health care system and may end up giving birth in a taxi or getting brought to an emergency room if there is a problem.

4. People in high cost areas. Many insurance companies charge different rates based upon where you live. There are two kinds of high cost areas, those where the cost of living is high, like San Francisco, and rural areas outside metropolitan areas, where there are few providers. Most expensive are high cost rural areas like ski resort communities, which have many rich residents, but also many low income workers who are maids, food service workers, and resort functionaries. Few HMOs and preferred provider plans include rural areas within their coverage areas at all, so it may be necessary to get a far more expensive traditional indemnity plan with no formal cost controls other than your share of a deductible.

5. People with pre-existing conditions. Many states prohibit insurance companies from denying coverage to people with certain health conditions. But, there is still a large group of people who are "uninsurable". This doesn't really mean that they can't get health insurance at all. Most states have an entity like Cover Colorado that provides health insurance at a high cost to otherwise uninsurable people on a subsidized basis (150% of the "standard rate"). For example, a 60 year old male smoker in Pitkin County (home to Aspen) who is uninsureable and makes $51,000 a year, can get health insurance for himself in Colorado with ordinary benfits and a $1,000 deductible for in-network expenses, but it will cost him $14,212 a year, far in excess of the $7,500 limit for individual under the President's plan.

6. Smokers Health insurance prices can typically be based on where someone is a smoker, as well as age and location. An insurable 60 year old male smoker in Pitkin County, will still pay about $9,475 a year for a typical plan with a $1,000 deductible. By the President's definition, the plan would be "gold plated", even though it is really merely expensive, not a high benefit plan. While we want smokers to pay their share of the costs associated with their habit, adding a health insurance deduction tax limitation to cigarette taxes and higher health insurance rates is counterproductive. It simply encourages smokers to defer care which makes it more expensive in the long run and in turn likely increases the share of health care costs for smokers paid by the public.

7. Union plans. Many labor unions, whose workers are frequently middle class manufacturing or office workers in large organizations, have traded cash income for health insurance plans with low deductibles. These plans are more predictable and easier to deal with for the consumer (who frequently has no meaningful ability to control provider costs through comparison shopping anyway), helps many union members who would be short on cash to pay big deductibles, and has tax benefits, because few families with half decent health insurance make use of the medical expense itemized tax deduction which provides no benefits for co-pays and deductibles under 7.5% of gross income. But, these are not fat cats with "gold plated plans" that a covering private rooms in hospitals and cosmetic surgery.

The Myth of the Gold Plated Plans of the Rich

The average American's understanding of a gold plated plan, is that a gold plated plan covers services that would be excluded from plans available to middle class Americans, like elective cosmetic surgery, private rooms in hospitals, premium birthing centers, mental health treatment in the form of luxury vacations and experimental treatments. Those plans are rare indeed and are probably not enough of a drain on the public purse through tax dollars lost to be worth regulating. If the truly rich lose tax favored treatment in the area of health insurance plans, it will simply be diverted to some other form of tax favored fringe benefit like fatter stock options or a bigger expense account.

The notion that there is a large overlap between people with high health insurance premiums and people who have stock options, corporate jets, second homes, fat bonuses, and a free concierge service at the office simply isn't true. Indeed, federal non-discrimation requirements in health plans make it hard to set up gold plated plans for these kinds of employees.

The reality is that the healthy rich, who (1) can afford to pay large deductibles if they must without sweating it, (2) have the time and sophistication to intelligently research low cost health care providers, and (3) will get preventative care without any financial incentives to do so, are the only people for whom high deductible plans are really appropriate.

The Low Deductible v. High Deductible Choice

The main way, all other things being equal, to reduce your health insurance premium, which is the only choice most employers have when selecting plans, is to choose plans with larger co-pays and big deductibles. In other words, to force employees to pay for health insurance with after tax dollars, instead of pre-tax insurance dollars (or to enroll in a supplemental health reimbursement or savings account plan of some type of mitigate this cost).

The reason that the President and economists like the late Milton Friedman have pushed these high deductible plans is that they believe that individual patients would control health insurance costs for particular services better than big health insurance companies devoted to nothing else do. The problem, as acknowledged by such liberal bleeding hearts as former Colorado Governor Owens, a Republican, and Republican candidate for Governor in Colorado Bob Beauprez, is that the health care market isn't transparent enough for consumers to make meaningful cost comparisons of the type necessary for this to work.

In the real world, a choice between a low deductible and a high deductible plan has nothing to do with cost control. It is a simple gamble. The high deductible plan consumer is betting that you won't get sick. The low deductible plan consumer is betting that you will get sick. Low deductible plans are more appropriate for low asset consumers, despite being more expensive, because they don't have cash reserves big enough to handle the downside risk that they lose the gamble. High deductible plans are more appropriate for high asset consumers, despite being less expensive, because high asset consumers can afford to take the downside risk.

Because of the lower premium costs, many people who really don't have the emergency funds necessary to afford high deductibles, buy high deductible plans. But, the main kind of cost control that takes place in those situations is that people refrain from getting non-catastrophic health care when they need it, not people bargaining for or comparison shopping for lower costs from providers. Thus, this is ultimately a bad approach to encourage as a matter of public policy.

Is The President's Plan Really Progressive?

The President basically sold his health insurance plan as a form of class warfare, a way for the middle class uninsured to get health insurance at the expensive of the fat cats with gold plated health insurance plans.

It is true that truly low income workers don't have health insurance plans with fat premiums. But, those workers also rarely pay much in taxes anyway, so they benefit least from a tax break. It is also true that middle income people in high cost situations often opt for high deductible plans and pray that they don't get sick, so that they can have something.

But, health insurance is not an economic arena where what you get is closely related to what you pay for it. The biggest driver of health insurance premium cost is whose buying the policy. As is often the case, this favors big business.

It probably costs less to buy generous health insurance for the senior executives at the Gates Rubber's headquarters in the South Platte Valley near Denver's Millenium Bridge, than it would cost to buy far less generous health insurance for the baristas at the Ink! coffee shop across the street.

Even if the tax policy Bush proposes is marginally progressive, this doesn't make up for a health insurance market and health care system that is starkly regressive. The uninsured pay more when the seek health care, and those who pay more for health insurance are rarely the truly privileged.

1 comment:

Jay said...

Bush's plan is mainly a finacial gimmick. It won't do anything to fix the problem because the people who need insurance still can't get it, and if they can, they still can't afford it. And health insurance companies will still compete based not on how healthy they can keep us, but on how well they can keep us paying premiums while not paying benefits. It's not the insurance company's fault though, they have employees and stockholders to protect. As soon as they start thinking altruistically, somebody will lose their job and get replaced by someone who doesn't.
Karen Davis of the Commonwealth Fund said "95% of the uninsured wouldn't get a significant amount of money from this deduction because they earn so little"