Health Care's Vicious Cycle

Thursday, August 31, 2006

TUESDAY'S REPORT from the Census Bureau adds to the fear that the employer-based insurance system is in long-term decline. The share of people without medical insurance edged up from 15.6 percent in 2004 to 15.9 percent last year, bringing the number of uninsured to a record 46.6 million. That increase is particularly striking because it took place despite a strong economy. It cries out for an imaginative policy remedy.

Even before the appearance of Tuesday's data, the trends in the health insurance market were disturbing. The total share of the uninsured has risen steadily from around 14 percent in the late 1980s to just under 16 percent now. But this slow shift has masked faster changes deeper down. Because public health programs such as Medicaid and the State Children's Health Insurance Program for poor children have expanded, fewer poor people are uninsured. But the share of middle-class workers without coverage has shot up. Among workers ages 25-34 who earn the median income or more, the proportion of those without insurance stands at 26 percent, twice what it was in 1979, according to Harvard's Katherine Swartz. In the 35-44 cohort earning the median or more, the percentage of the uninsured stands at 19 percent, also a near doubling.

Poor Americans remain far more likely than rich ones to be without insurance. But the decline of insurance coverage among the middle class reflects pressures that weaken the system for everyone, and that are likely to get stronger. As health care has grown more sophisticated, health spending per American has doubled since 1975 in inflation-adjusted terms, driving up insurance premiums correspondingly. As a result, small companies and self-employed people think twice before buying insurance; companies that hire mainly young and healthy workers, or self-employed people who are young and healthy, frequently decide that insurance is not worth paying for. This exit of inexpensive patients from insurance pools drives up premiums for patients who remain, forcing yet more exits. Because of this vicious cycle, insurance for small firms or individuals grows prohibitively expensive. Add in the trend toward self-employment and the outsourcing of work to small contracting firms, and you can see why the traditional health insurance market is allowing a growing number of workers to fall through the cracks.

Congressional Republicans offer one reasonable idea to make health insurance more affordable: reduce the number of mandates requiring insurers to cover particular medical conditions. This would free insurers to offer slimmed-down policies that might appeal to healthy workers who now opt not to buy coverage. Unfortunately, too much slimming down can create fresh problems. Excluding coverage of a condition such as mental illness from most policies could drive up the cost of policies that do cover mental health, harming a vulnerable minority.

A second option, which has been tried successfully in New York state and is being considered in Vermont and Massachusetts, is for government to backstop private insurers that sell coverage to small firms and individuals. To get around the problem that the customers who have not exited these markets are sicker than average, government can promise to reimburse insurers when the bills generated by a patient rise above, say, $50,000 in one year. That way the high risk of offering insurance to small firms and individuals can be removed. Premiums will fall back to around the level offered for workers at large firms, and the vicious cycle will be broken.

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