Two simple ways to reduce health insurance premiums

Summary:
Many people are burdened by the high cost of health insurance premiums. There are options to reducing these premiums without sacrificing quality of care, and without risking a failed overhaul of the health care industry.

A 2009 study by the AHIP Center for Policy and Research, entitled Individual Health Insurance 2009: A Comprehensive Survey of Premiums, Availability, and Benefits (PDF download), reveals a great deal of facts about health insurance premiums throughout the United States.

Going through this report, one can identify two simple but effective steps to reducing the cost of health insurance:

1. Allow people to buy insurance from out-of-state.

Consider three facts revealed in the study:

  • Residents of New York pay the highest annual health insurance premiums ($6,630 for individuals, $13,296 for families).
  • The national average is less than half of that ($2,985 for individuals, $6,328 for families).
  • Lucky residents of North Carolina (a not uncommon retirement place for former New Yorkers) pay even less ($2,613 for individuals, $5,120 for families).

Conclusion: Allowing New Yorkers to buy insurance out of state can save up to $6,000 per family per year.

What harm could be caused in this? Is insurance from North Carolina (or any other state, for that matter) so inferior to insurance in New York? Neighboring states like Connecticut have rates up to 40% lower — why can’t we take advantage of those? If someone insured in New York can get medical coverage while visiting relatives in California, why can’t they buy (cheaper) insurance from California?

The irony is that out-of-state insurance is prohibited for individuals but permitted for employers. My employer has offices in New York (where I work), San Francisco, Seattle, and Michigan. Some employees live in those states, and some live in New Jersey, Pennsylvania, and Washington, D.C.. The health plan originates in Michigan, yet we all participate in it and get more than adequate health coverage. If an employer can do it, why can’t an individual? (I’ll tell you why: a bureaucrat said you can’t, so insurance providers don’t offer out-of-state options.)

(For more, read Rx: The Interstate Insurance Competition Cure.)

2. Expose the cost of employer-provided health premiums to employees, and give them options.

In the study, the average premium for a family plan with no annual deductible was $12,686. Increasing to a $1,000 annual deductible (whole family) reduces that by nearly $5,000. Why on earth would someone pay $12,000 for a plan with no deductible, when you can buy a plan with a $1,000 deductible for $4,000 less? No one would; but they would it someone else is paying, of course.

Consider if you were buying a car with someone else’s money. What incentive do you have to keep costs down? You can go for a $5,000 used car, but it isn’t your money, so you will try to get a $20,000 new car. Or maybe something more luxurious — maybe a $35,000 car with all sorts of navigation and entertainment systems. After all, it isn’t your money, so why be frugal?

When health insurance is provided through an employer, the only costs we know of are our co-payments and our contributions. In many cases, both of those are overshadowed by the overall cost of the plan, which is paid by the employer. The actual cost is hidden from the employee. As a result, employees — notably trade unions, who have more leverage than individuals — will wrestle the best possible health insurance plan from employers. The “gold-plated” plans you hear about aren’t just for the executives; it’s also for labor unions.

If your employer gave you the choice of a $1,000 deductible health insurance plan and a $5,000 raise, or a no deductible health insurance plan and no raise, what would you choose?

Small changes can yield big results

Health care reform is difficult because the health care industry is huge. Taking up greater than 16% of the entire GDP, and growing each year, health care takes up no less than $2 trillion of our economy. To think that 500 or so bureaucrats, together with their advisers, can redefine such a large part of the U.S. economy is foolish (even in 2,000 pages of legislation).

Instead of total reform, we need to make incremental changes; to review the effectiveness of those changes; to make continued, small adjustments along the way; to set and work towards achieving reasonable, long-term goals. In software development, this is known as the agile method (allowing solutions to evolve through small incremental changes). Similar principles can — and should — exist in public policy.

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4 Comments.

  1. Great points. I was not even aware of the disparity of premiums between NY and CT being that insane.

  2. I went to a financial marketing conference a couple years back and I spoke to the Chief Marketing Officer of The Hartford. He had a new plan that they were promoting for health insurance for people in their 20’s that were no longer covered by their parents or under their college plan.

    He told me that NY law was so restrictive on this type of plan, they didn’t sell it in NY at all. The plan offerred low cost insurance (high deductable) the type of insurance a young person should have to cover them for something major and where they can pay for minor things.

    It was deciding what you wanted covered cause they know more then you. This resulted in less choices and young people not being able to afford the insurance. Really stupid stuff.

    So if I wanted insurance and said that I don’t need to be covered for chiropractor, I can’t get a policy like that even though it would save me money.

  3. Liked your post. I’m gonna show this to my (future) bf heh. Hope you’re having a good Sunday. – Danielle

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