Health Insurance Experiment in a Social Laboratory

Associate Supreme Court Justice Louis D. Brandeis once wrote that the various states of the union can function as social laboratories, experimenting with government programs on a small scale to see what works. In a dissenting opinion to New State Ice co. v Liebmann (1932), Justice Brandeis wrote, “A single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Brandeis’s proposed scheme recently has been tried by the state of Massachusetts. In 2006, the state enacted a health insurance overhaul that is strikingly similar to the national health care insurance legislation signed into law by President Obama in March. The Massachusetts experiment has been in place long enough now to find out if it is sustainable.

Recent news out of the Bay State suggest it is not.

Many of the points I made in this space during the debate over health care insurance have been proven true by the Massachusetts experiment. Particularly, I predicted that mandates placed on the insurance providers requiring the coverage of people with pre-existing medical conditions would cause the costs for everyone to skyrocket. How else would the astronomical cost of insuring seriously, chronically, or even terminally ill patients be covered?

According to a story in The Boston Globe, this is exactly what is happening. The largest health insurance providers proposed a rate increase to help offset the cost of insuring those with pre-existing conditions. Hoping to mask the true cost of their health reform legislation, state regulators denied the rate increase. Facing millions of dollars in losses and eventual insolvency, the six largest health insurance providers in Massachusetts filed suit to have their rate increases approved. Robert Weisman of The Boston Globe reported:

A half-dozen health insurers yesterday filed a lawsuit against the state seeking to reverse last week’s decision by the insurance commissioner to block double-digit premium increases — a ruling they say could leave them with hundreds of millions in losses this year.

The proposed rate hikes would have taken effect April 1 for plans covering thousands of small businesses and individuals. Insurers wanted to raise base rates an average of 8 percent to 32 percent; tacked on to that are often additional costs calculated according to factors such as the size and age of the workforce.

Yesterday’s legal action sets the stage for a showdown between state regulators and the health insurance industry.

Governor Deval Patrick has made reining in runaway health care costs a centerpiece of his administration and his campaign for reelection — contending they are stifling the capacity of small businesses to create jobs. At the same time, health insurers argue that government is forcing them to sell policies at a loss that is unsustainable as the costs of medical services climb.

I also predicted that the fines the federal legislation calls on the IRS to levy against taxpayers who do not enroll in a health insurance plan are not large enough to force those who do not want insurance to buy it. In fact, any motivation to buy health insurance created by the fines is more than offset by the more serious mandate that allows the uninsured to wait until they are sick or need medical attention before enrolling in a health insurance plan. A certain number of people will game the system—especially in a down economy. This is exactly what the Massachusetts experiment has revealed.

A staff reporter for The Boston Globe name Kay Lazar wrote about how thousands of Massachusetts residents are waiting until they need medical attention before signing up for health insurance. Since the health insurance providers cannot turn them down, the patients are having their care paid for by the insurance companies. Lazar reported:

Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses.

In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and ran up claims of more than $1,000 per month while in the plan. Their medical spending while insured was more than four times the average for consumers who buy coverage on their own and retain it in a normal fashion, according to data the state’s largest private insurer provided the Globe.

The typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month. The previous year, the company’s data show it had even more high-spending, short-term members. Over those two years, the figures suggest the price tag ran into the millions.

“These consumers come in and get their service, and then they leave because current regulations allow them to do it,” said Todd Bailey, vice president of underwriting at Fallon Community Health Plan, the state’s fourth-largest insurer.

It doesn’t take a genius to foresee the pitfalls of ignoring actuarial reality. The foundation of insurance is actuarial science. Massachusetts has proven in the social laboratory that the laws of actuarial science are immutable.