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Health Insurance Economics 101

Our nation's health care financing system is clearly in a state of crisis.  Whether that system is viewed as pluralistic or piecemeal, it is failing miserably to meet any of the four cornerstone objectives that must underlie any balanced health CARE policy platform:

                        Cost containment,
                        Assurance of quality,
                        Resource availability, and
                        Equity of access.

        In the last debate last week, at least President Bush acknowledged through his advocacy of Health Savings Accounts that he understands how deleterious market imperfections caused by too much insurance of the wrong kind can be. By contrast, Senator Kerry appeared absolutely clueless about the underlying causes of our mounting health care financing crisis, vapidly reiterating his “plan” to provide all Americans with the same kind of coverage provided members of Congress.

        Depersonalizing health care issues helps undergraduate students here at St. Cloud State illustrate the political, social, and economic forces that have led our country into its current health insurance hazard morassStudents “get it” when we talk about cars, rather than human bodies. Here’s what they hear.


        Once upon a time, members of Congress sought to achieve in one piece of legislation three objectives:  reducing the budget deficit, decreasing our dependence on foreign oil, and (most importantly) getting themselves reelected.  What did they do?  By imposing an additional $1 per gallon tax on gasoline they tried to realize their first two aims.  But to make the tax politically palatable, expansive new benefits had to be enacted for the majority of their constituents.  So the tax measure was coupled with new vehicle health insurance provisions that became law as the Vehicle Efficiency and Fiscal Responsibility Act (VEFRA).

        Under VEFRA all private sector employers were entitled to deduct as a business expense any level of premiums they paid for new insurance coverage that would provide tax-free vehicle protection for their employees and dependents.  Hundreds of insurance companies began offering comprehensive vehicle health policies.  Employers and unions rapidly adopted richer and richer benefit plans in lieu of higher wages that would be subject to both FICA and individual income taxes.

        Public sector employers had to keep pace.  To attract and retain competent employees, they, too, offered competitive vehicle health insurance packages.  But unlike proprietary employers, they received no tax subsidy from the federal government to help pay for the new employee benefits.  Guess what? State and local tax burdens started to rise more rapidly than did their jurisdictions' underlying economies.

        But seeing the popularity of these new benefits for employees and their dependents, Congress quickly moved to amend the Social Security Act to cover vehicle owners who were either over age 65 or poor.  After all, wasn't access to quality medical care for one's automobile an inalienable right of every American?  "Motorcare" and "Motorcaid" became law.

        Automobile mechanics seized the financial opportunities afforded them by legislation that effectively hid from consumers virtually all the costs of treatments prescribed.  Under the auspices of the American Mechanics Association (AMA), new graduate programs at major universities not only awarded motor doctor (M.D.) degrees, but also established internship and residency requirements for areas of specialization and sub-specialization.  Hosts of new vehicle illnesses and treatments were soon discovered.  Legislatures responded to published journal articles by mandating coverage for an ever-widening array of morbidity hazards.  Health policies were soon required to cover treatments for such conditions as ethanol abuse, dermatological paint abrasions, on-board computer viruses, trans-manifold joint (TMJ) disorders, carpool tunnel syndrome, and grill-bra prolapses.

        Facing only a nominal $10 deductible, insureds exposed their insurers to the moral hazard of over-utilization as they read Popular Mechanics for hours on end in car-care-clinic waiting rooms, while their automobiles received monthly tune-ups.  Elaborate in-patient auto hospital services proliferated to meet the mounting demand of others who manifested morale hazard by not taking care of their cars and letting them smoke too much.

        Society's propensity to sue for mechanical malpractice grew with its collective entitlement expectation for perfect treatment outcomes, thereby reflecting an increasing mores hazard.  One trial lawyer made millions suing mechanics who tried to deliver oil changes prematurely without using expensive “C-Clamps;” he is now running for Vice President of the United States.

The moron hazard realized by insureds at the hands of motor doctors heightened, as the prospect of dealing with a loose spark plug was explained in Latin, complete with co-morbidity diagnoses and polysyllabic prescriptions.  Vehicle medical facilities evidenced a pernicious more & more hazard, as they abided by the technological imperative to use only the newest MRI equipment to isolate a broken fan belt.

Consequences of the Health Insurance Hazard Morass

        In the past forty years the average annual income of carburetor-transplant surgeons shot up by $700,000.  The cost of vehicle health insurance rose almost three times as rapidly as did the CPI, and the percentage of our nation's GDP expended on automobile repair skyrocketed from 6% to well over 15%. If left unchecked, that percentage should top 20% by the end of this decade. Make no mistake; demographics and economics are on a collision course in time, exacerbated by tax-subsidized, service-specific, insurance-induced, demand-pull inflation.

Who is receiving the subsidy (of well over $150 billion this year)? Not the poor. No, the answer is: wealthy motor doctors, trial lawyers, and now pharmaceutical companies.

Despite our profligate spending, we are still being told that our cars are sicker than ever. And now, rural repair garages have disappeared, as M.D.s flocked to urban markets where totally inelastic demand curves kept marching to the right. Many specialized mechanics practiced overly defensive vehicle medicine, while others left practice – unable to afford annual mechanical malpractice insurance premiums that in some cases topped $400,000.

The vehicle health care crisis deepened; 45 million Americans were found to be uninsured or underinsured motorists, apparently squeezed out of the system by unscrupulous underwriters and uncaring employers. 

        Politicians and the national media were shocked!   Extensive coverage was provided by Time, the New York Times, and even Oprah.  An unknown Democrat once defeated a former U.S. Attorney General (who, by the way, is now “investigating Dan Rather and Mary Mapes) for a U.S. Senate seat from Pennsylvania, using the slogan:

"If criminals have a right to a lawyer, drivers ought to have a right to a mechanic."


        Over the last decade, politicians of all stripes have been demanding reform.  Depending on which group contributed the most their campaigns, they variously represented the interests of vehicle health care providers, payers of benefits, or purchasers of insurance.

        Led by the AMA, providers lobbied for a "pay or play" proposal that would force small employers either to buy comprehensive auto medical insurance for all employees and their dependents, or to pay into a new motor pool.  What they saw as critically important was the need to reduce the number of Americans without funds to pay them.

        Those providers who belonged to HMO councils tried also to manage the morale hazard of motorists' not providing their vehicles with enough preventive care.  They sought to finance higher levels of reimbursement for the maintenance-clinic services they provided for newer model cars.  So, naturally they proposed a surcharge on auto hospital services that were used primarily by owners of older and sicker vehicles.

        Meanwhile, the insurance industry was actively developing its own defensive proposals that would best protect its members' interests as third-party payers of benefits.  The Vehicle Health Insurance Association of America (VHIAA) teamed with several states' Insurance Federations to endorse plans that would increase small employers' access to private insurers.  They reluctantly agreed to support provisions that would limit slightly their ability to impose pre-existing condition exclusions and to practice experience-rating on smaller groups.  But their plans stopped well short of any return to community-rating for group coverage; and they would be able to preserve their individual underwriting departments.

        Payers saw control over such manifestations of moral hazard as adverse selection and service over-utilization to be vital.  Higher and higher deductibles and out-of-pocket cost-sharing levels were offered.  Some larger insurers proposed providing all citizens with an umbrella of catastrophic "Major Motor Risk Insurance."  While the federal government could be involved in the collection of new taxes needed to pay for expanded coverage, claims would, of course, be administered by private insurance companies.

        Many payers also sought to compete for revenue in the new "managed health care" arena, where ratios of ASO fees to at-risk premiums were rising. Several companies hired auto mechanics as Vice Presidents of Provider Underwriting.  They established their own PPOs, mandated utilization review programs, and offered case management services to try to control the moron hazard felt by their unsophisticated insureds at the mercy of highly trained motor doctors.

        Purchasers of vehicle health insurance held fast to their own unique perspective on the hazard morass.  Profitable private employers resisted any attempts to limit the tax-deductibility of their contributions to vehicle health plans.  So long as health premiums could keep rising at a manageable rate, so too would their labor-market advantage over public sector and non-profit employers.

        Neither did larger private employers with a self-selected, healthy workforce want to lose  the  advantages  they  enjoyed  by being able to self-insure their employees' auto risks . . . or at least to use high credibility weights in the experience-rating formulas used by their insurers.  Adoption of a Canadian-styled national health insurance plan, paid for and administered by the federal government, would jeopardize their advantages.

        But the costs of providing extensive vehicle health benefits were rising too rapidly for even profitable employers.  More and more private companies joined forces in purchaser coalitions that tried to wield oligopsonistic power in the motor care market.  The excessive list of covered auto conditions also had to be reduced.  Control of the morbidity hazard meant having to restrict employees' access to elective and/or experimental treatments for their cars.  Such services as ethanol-abuse counseling came to be performed by employers in-house as part of their "Employee Assistance Programs."

For their part, politicians kept trying to please all parties to the party – including the pharmaceutical industry that kept developing more and more sophisticated oil additives for senior citizen motorists. So in 2003, President Bush signed into law a massive expansion of benefits in the Motorcare program, while making sure that motorists could not import any potentially dangerous, oil additives from Canada.


        The conclusion to this story has yet to be written.  Each proposal for solving our nation's health care crisis seems to have some merit.  But will leaders in business, medicine, and government address holistically all of the hazards of the health insurance hazard morass?   Will common ground be found in the proposal by President Bush to expand rapidly the use of Health Savings Accounts (HSA’s), to make drivers themselves much more responsible for financing the care of their own autos, thereby reducing the magnitude of market imperfections?

        Perhaps not.  There may be too many vested interests.  Politicians still represent the organized interests of providers, payers, purchasers, and pharmaceutical companies.  But who will represent the individual tax-paying patient?   You, today's undergraduates may be forced to emerge in the next decade as the ones to deal with the financial as well as physical meanings of a future Newsweek cover story entitled, "The Enfeebling of America."

David L. Christopherson, PhD, CLU

Professor – Insurance

G.R. Herberger College of Business

St. Cloud State University

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