Daniel Sutter: Coverage mandates and the cost of health insurance

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The Republican effort to repeal and replace the Affordable Care Act (ACA) has stalled for now. The ACA’s effects on the insurance market include over ten categories of essential health benefit mandates. States impose numerous additional mandates on health insurance. How do mandates affect the cost of health insurance?

Mandates require all policies to cover specified procedures and treatments. One example is the ACA’s mandatory coverage of all FDA approved methods of contraception without a co-pay or deductible. Eligibility for Federal subsidies provided the legal lever for ACA mandates, while states impose mandates as part of insurance regulation.

Once imposed, mandates incur costs as policyholders receive covered treatments. These costs are covered by premiums charged to all policyholders. Premiums must also cover insurers’ administrative costs.

Are the ACA’s mandated benefits a good or bad thing? The services clearly provide value to patients. But I think that asking if the benefits are good is like asking if minivans are good or bad. The relevant question is whether a minivan provides for a given family’s transportation needs. Families should compare the value offered by different vehicles with the list prices. Insurance differs from buying a car, because at the time of purchase we do not know which illnesses and injuries we will face. Consequently, we buy coverage for categories of treatments, so consumers should compare the value of coverage categories to the cost.

People who use a mandated service are better off. For example, smokers might eventually use smoking cessation coverage. Nonsmokers will probably not want to pay higher premiums for smoking cessation coverage. If only smokers buy this coverage, the cost is not much different from paying out of pocket.

All insurance buyers share the cost of each mandated services and so shift costs. Women pay less for contraceptives, while smokers pay less to try to quit. Mandates allow politicians to deliver lower costs to users of these services without imposing taxes to pay for the coverage.

Mandates drive up the cost of health insurance without producing offsetting value. Federal and state mandates amount to ordering every optional feature on a car. A Chevrolet with enough options can cost as much as a Cadillac. The mandates force individuals to purchase and let businesses offer employees only Cadillac-priced health insurance. Bundling many mandates makes for a less attractive package. Women pay less contraceptives, but they must also pay for smoking cessation and other services they may never use.

Costs rise for a second reason. Health insurance involves third party payment, meaning by the insurance company (the first two parties are the patient and the doctor). When a third party pays the bill, neither the patient nor doctor – the two people in the room discussing treatment options – has an incentive to consider cost. For some elements of medical care, we probably want to ignore cost. Many of us would consider it unacceptable to make someone endure pain to spare the expense of hip replacement surgery, or use a less costly and less effective cancer treatment. Few of us would want to purchase a health insurance policy that shortchanged us like this. We would willingly pay more for better coverage.

On elements of care with more modest benefits we want to consider cost. Prenatal care is obviously important, but should a pregnant woman see an obstetrician every week, or daily? Deductibles and co-pays provide patients an incentive to think about cost and thus help manage third party payment problems. But mandates often rule out co-pays and deductibles. We should only incur the cost of third party payment when patients face a life or quality of life threatening illness or injury. Frequently mandates make us bear third party payment costs for less important treatments.

All goods and services are costly, including medical care. We need to balance the benefits and costs. Mandates force all Americans to buy Cadillac coverage when many would prefer a more affordable Chevy. Republicans can make health insurance more affordable and yet not less valuable by pruning back coverage mandates.

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Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

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