Code Red: Two Economists Examine the U.S. Healthcare System

October 24, 2007

Insurance Portability

Filed under: Health insurance,Portability — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:23 am
Tags: ,

David Dranove:

Will,

The portability of health insurance is one of the most important policy issues facing this nation, yet it seems to have been overlooked in the ongoing debate about health reform.  I recently heard from my dear friends, Don and Sue (not their real names), and their unsuccessful effort to obtain health insurance is a startling reminder of how our health care system remains screwed up.

You remember Don and Sue.  They were successful consultants who loved to sail.  They had always wanted to cross the Pacific Ocean and realized that they had better get going before they got too old.  So they left their jobs, bought a beautiful boat, and set out for the journey of their lifetimes.  They have been at sea for two years, living out their dream.  Unfortunately, Sue has developed a chronic disease that is only going to get worse.  She can still perform her duties on the boat, but not for much longer.  In the years to come, she is going to require a lot of medical care that won’t come cheap.  Don and Sue did okay for themselves in their careers, but not so well that they can ignore the medical bills.  And like everyone else, there are other unpredictable illnesses that await them.

Don and Sue had planned to return to the states to live in California.  They have spent the past few months trying to obtain health insurance coverage, with no success.  They report that the process has been time consuming and confusing – and if Don and Sue say it is confusing, that is saying a lot.  No insurer will cover Sue due to her preexisting condition, and now that she has been out of work for a while, she is not eligible for COBRA coverage.  Don is even finding it impossible to buy individual coverage.  He tried to get insurance through AARP but, as he put it, “The iterative information requirements were impossible to meet long distance. They put time limits on our responses that were violated by the time we got the questions.”  He has been rejected for travelers’ health insurance, despite being in perfect health.

Don summed up their experience this way:  “People often ask us what our scariest experience has been on the trip.  Losing our COBRA coverage by far has been the most hair-raising experience.  Lots of Americans might imagine they could cross the ocean on a sailboat. Very few would be willing to step away from health insurance coverage.”  Enough said.

Don and Sue’s experience reminds me a bit of another friend, Steven (another pseudonym).  Steven was a university professor and a fantastic teacher.  Unfortunately, Steven’s young child had major health problems.  When Steven was looking to change jobs, he could only find one employer whose insurer would cover the child, and that employer was not in academia.  In time, the child’s condition stabilized, but for many years Steven was unable to explore other job opportunities.  This happened before HIPAA and the protection it affords to workers changing jobs; I suspect that Steven and his family would have an easier time now, but after hearing from Don and Sue, I wonder.

Perhaps Don, Sue, and Steven won’t arouse too much sympathy in some circles.  After all, they have been blessed by economic success, even as they have had to deal with very difficult personal and family health issues.  But almost everyone knows someone whose career choices were affected by the availability of health insurance.  Regardless of whether the affected individuals could afford the medical bills, there is no doubt that these problems place an enormous drag on the overall economy.  American businesses will no longer have the benefits of Don and Sue’s advice.  For many years, Steven was not teaching.  Such a waste, and all because our health insurance system ties insurance to employment in a way that limits job mobility.

As you know, there has been a lot of research on this problem, which academics have labeled “job lock.”  Though there is some disagreement among academics, the consensus is that a large percentage of potential job changers—I think as many as a third, though I may be overstating it a bit—stay with their old jobs out of fear of losing insurance.  There is also some evidence that workers are reluctant to retire early for fear of losing their private insurance before Medicare kicks in.  These are just some of the ways in which insurance markets affect job markets.  COBRA and HIPAA were supposed to minimize these problems and to some extent they have proved successful.  But you have to stay in the labor force and keep your insurance current to qualify.  Too many Americans fall through the cracks.

All the major Presidential candidates (at least those on the Democratic side) seem to be aware of this problem, even if they do not say much about it on the campaign trail.  Clinton, Edwards, and Obama have all proposed a combination of employer “pay or play” and individual “purchase mandates” (individuals must contribute some amount towards health insurance, with subsidies based on income) with rules to assure that no one is denied coverage (either through the private sector or a government plan.)  These ideas originated with Alain Enthoven’s 1978 Consumer Choice Health Plan.  I always thought of Enthoven’s plan as a “Republican” proposal, relying mainly on free market insurance.  Yet it was Ronald Reagan who originally blocked Enthoven’s plan and once again Republicans seem to be lining up in opposition to any proposal that sniffs of government mandates.  I am no fan of most government mandates, but not this one.  With the exception of a few billionaires, anyone who does not buy health insurance is a freeloader in the making.  Medical providers are not going to let anyone suffer for lack of medical care.  Someone will have to bear the costs of treatment; making everyone buy insurance is the best way to make sure that we all pay our fair share.

This is not to say that I am entirely pleased with some of the Democratic proposals.  (I like Obama’s plan a lot more than Clinton or Edward’s for example.)  But I think I will save these thoughts for our next exchange.  In the meantime, let me suggest that the labor market spillovers from our health insurance system are too important to ignore.  This is a topic that should take center stage in the health policy debate.

David


William White:

David,

Portability is certainly a problem.  How big a one we could debate.  One third of potential job changers seems large for an estimate of the affected population.  However, let’s not go there. With an aging labor force and changing patterns of employment, this problem seems only likely to get worse if left unattended and I agree it it would be good to get fixed.  Key questions are how bad the current situation really is and what could be done to make it better?

Your anecdotes are compelling.  But I am not sure the situation is as dire as you describe.  For example, here in New York we have guaranteed issue for individual health insurance policies.  For Sue, there would be a waiting period for pre-existing conditions, so there could still be substantial financial risks involved.  So it’s not ideal.  But at least in New York neither does it seem Sue is completely “uninsurable.”  (Rules vary from state to state.  A good place to start for a summary of state regulatory provisions is Georgetown’s http://www.healthinsuranceinfo.net ).  An alternative is to seek employment from a large firm with group benefit, although again, pre-existing conditions may be a problem—here at Cornell for my health plan, a new employee has a waiting period of 42 days before coverage begins.

One can argue about the merits of regulations like guaranteed issue from a public policy standpoint.  Not only do they still leave people like Sue with exposure to big financial risks before coverage kicks in.  As work by my colleague Kosali Simon here at Cornell shows, they can have unintended consequences.  Individual rates are like to go up, especially if there is community rating, and her research suggests that while state guaranteed issue laws increase coverage for high risk consumers, they lead to lower coverage for low risk consumers and as a result, the impact on overall coverage is pretty much a wash.  But at least from the standpoint of Sue, they certainly seem better then nothing.

In terms of reforms, single payer advocates have an easy answer of course— universal coverage.  Even if you don’t like single payer, as your own discussion suggests, almost any likely variant of comprehensive reform, be it Enthoven’s “pro-competitive” 1978 Consumer Choice plan or Massachusetts style mandates, would largely if not entirely eliminate the portability problem.

What seems much more problematic is incremental changes.  Guaranteed issue offers a cautionary tale of the potential untoward effects of tinkering at the margin within the context of our current fragmented system of private coverage.  I’d be delighted to hear suggestions for simple incremental measures that could reduce portability problems with only limited downsides.  But I’m not optimistic and inclined to argue its best to focus on broadly on comprehensive reforms versus singling out portability as independent issue.  Then again, I might of said the same thing on the eve of the Clinton’s reform efforts in the early 1990s and portability issues are still very much with us.

2 Comments

  1. Will,

    I am not sure if California has the same type of rules as New York for guaranteed issue, but whatever the rules, the red tape has been overwhelming. Don described the process as “confusing” and “hair-raising”. And Don is one of the smartest people I know!

    DD

    Comment by David Dranove — October 24, 2007 @ 9:30 am

  2. David and Will,

    I think part (but certainly not all) of the problem is state regulation of insurance. We have 50 different sets of regulations, leading to a crazy quilt of different environments. There are also 50 different risk pools—underwriting has to be done within each state. Last, this regulatory system provides a big incentive for employers to opt out by self-insuring. This creates a very unequal playing field.

    Unfortunately I don’t believe that any of the current presidential candidate’s proposals even acknowledge this as a problem, although it may be that there are constitutional reasons why insurance regulation is done by the states (I don’t know).

    Marty Gaynor
    Carnegie Mellon University

    Comment by Martin Gaynor — October 28, 2007 @ 11:46 am


RSS feed for comments on this post.

Blog at WordPress.com.

%d bloggers like this: