A Real Health Rx
May 25, 2005

By Regina Herzlinger

NEW York is the fifth-wealthiest state - but also has the second-highest rate of adults lacking health insurance, with some 3 million uninsured.

This, even though the state government spends $45 billion a year on health care for the poor, through what is by far the nation's most expensive Medicaid program.

Some tell you that more state intervention is the best way to reduce the uninsured. They'd have Albany require all businesses or individuals to buy health insurance; many would even have it specify exactly what benefits the insurance should cover. Good advice, if New York wants to lose even many more businesses and workers to the rest of the country.

The Empire State already has the nation's second-highest tax burden. Requiring everyone to pay another $9,000 - the average 2002 premium for New York's employment-based health insurance - would surely accelerate taxpayers' departure. And, when it comes to mandates, New York already requires the coverage of 43 different health-insurance benefits, far more than the average state - and one reason that insurance costs so much here.

Is forcing businesses to follow government's directions the best way to make goods and services widely available? Or should we, instead, unshackle businesses so they can make things cheaper and better?

The auto industry provides one answer. The free market has produced cars that are both better and cheaper. Simultaneously, their costs have dropped 44 percent relative to income over the past decade, even as they've grown more stylish and reliable. As a result, 70 percent of the poor own one car and 30 percent own two or more.

In contrast, government-controlled health insurance is so expensive that nearly 40 percent of New York's non-elderly uninsured are middle-class families, with annual incomes at least double the poverty level. The uninsured rate is well above the national average in the state's wealthiest region - New York City and its suburbs.

Why can poor people afford to buy cars while middle-class people can't afford to buy health insurance?

Because the car industry is consumer-driven: Individuals buy cars and the competition among different manufacturers has made them better and cheaper. Excellent information about the quality and price, from sources like Consumer Reports and J.D. Power and Associates, enable consumers who don't know a valve from a piston to become astute car shoppers.

But health insurance is purchased primarily by third-party agents - employers and governments acting on behalf of consumers. No matter how smart, they can't possibly know the customer's value-for-the-money preferences.

The free market is the best way to reduce the number of uninsured. One example, championed by Rep. Bill Thomas (R-Calif.): Health Savings Accounts (HSAs), coupled with high-deductible ("catastrophic") insurance policies. Here, the insurance covers only exceptional medical expenses - you use funds from a tax-sheltered savings account to pay for routine costs, like checkups.

The effect on cost is dramatic. JoAnn Laing of HSAfinder.com notes that Empire Blue Cross and Blue Shield's 2005 rates for HSA-compatible policies are almost 44 percent lower than 2004, as low as $182 per month for singles and double that for families. And rates for these policies have grown a minimum of 10 percent slower for small businesses, as compared to the rate increases for traditional plans of 15 percent.

HSAs were introduced nationally in 2004 - and plainly filled an existing demand. Some 34 percent of enrollees were previously uninsured and 21 percent of policies were sold to small groups that previously offered no insurance. The Swiss health-insurance system, in which consumers mainly purchase high-deductible policies, demonstrates that these savings do not diminish health status.

New York can encourage the spread of such innovative policies by clearing away laws and regulations that hinder insurers from offering them. Currently, most high-deductible policies designed to complement HSAs in New York are still subject to the same coverage mandates that drive up the cost of traditional forms of health insurance in the state.

To reduce the number of uninsured, the carrot of low-cost insurance policies is far more effective than the stick of higher taxes or more costly mandates on New York's already overburdened taxpayers.

Regina E. Herzlinger is a senior fellow at the Manhattan Institute for Policy Research, a professor at the Harvard Business School and author of "Consumer-Driven Health Care."

©2005 New York Post

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