Health Care Policy Cost Index 2012: Ranking the States According to Policies Affecting the Cost of Health Coverage by Raymond J. Keating Chief Economist Small Business & Entrepreneurship Council February 2012 Protecting Small Business, Promoting Entrepreneurship www.sbecouncil.org 1
Health Care Policy Cost Index 2012: Ranking the States According to Policies Affecting the Cost of Health Coverage The employer costs of providing health care coverage and the overall cost of health care just keep rising. A big part of these rising costs have to do with unwise and unwarranted government intervention in the health care marketplace. In September 2011, the Kaiser Family Foundation/Health Research & Educational Trust reported, based on its 2011 Employer Health Benefits Survey, that the average annual premium for employer-sponsored family health coverage increased by 9 percent in 2011 to $15,073. That 9 percent increased compared to a 2.1 percent in workers wages and 3.2 percent in general inflation, according to the report. As for national health spending, it continues to rise, however, at a slower rate in 2009 and 2010. The latest data from the Centers for Medicare & Medicaid Services noted that expenditures increased by 3.8 percent in 2009 and 3.9 percent in 2010. This slowdown in 2009 and 2010 was due at least in part, to the poor economy, and to a 2009 decline (-4.9 percent) and a tiny 2010 increase (1.9 percent) in investment. In particular, investment in structures and equipment fell by 8.9 percent in 2009 and was down by 0.8 percent in 2010. At the same time, government health care spending, and therefore taxpayer costs, have continued to rise rapidly increasing by 9.7 percent in 2009 and 6.5 percent in 2010. In recent years, government s share of national health expenditures have risen dramatically, from 35.5 percent in 2000 to 40.6 percent in 2007 to 44.9 percent in 2010. With the scheduled continued phase in of the Patient Protection and Affordable Care Act (ObamaCare), the government s share promises to rise still further in coming years. Part of the increase in health care spending is for new and improved treatments and care. That s a clear positive. A key negative aspect of increasing costs is tied to third-party payments. That is, when a third party for example, an employer-provided insurance plan or a government program pays for treatment, then neither the health care provider nor the health care consumer needs to be concerned about costs, as a result prices and utilization increase. The phenomenon is worse when government is the third party payer, since the incentives in government itself is to spend more and to be relatively unconcerned about gaining efficiencies and eliminating waste since elected officials and government bureaucrats are spending other people s money. Regulations and mandates are additional governmental measures that drive up health care costs. When government overrules the marketplace, and forces health insurers to extend coverage, or assess risk and price services based on political preferences rather than, for example, sound economics and demographics, the inevitable results are increased costs. Finally, it s worth noting that not all changes in health care policy turn out for the negative. Reforms that expand the market, including greater consumer control and choice, work for the better in terms of health care costs. 2
Health savings accounts (HSAs) serve as a positive example. HSAs are tax-free savings accounts owned and controlled by individuals, with funds deposited tax free into the account by the employee, employer or both, and earnings accumulating tax free. The funds are used to cover regular, predictable medical expenses, and each HSA is tied to a traditional catastrophic insurance plan to cover large health care expenditures. This kind of reform has the effect of eliminating the third party payer problem, and returning insurance to its true purpose, i.e., protecting against large, unforeseen costs. For good measure, HSAs present real savings in terms of total annual coverage costs about 11 percent in 2011, based on data from the Kaiser Family Foundation/Health Research & Educational Trust report. And the growth in HSAs has been significant. Among firms offering health benefits, the percent offering HSAs has grown from 2 percent in 2005 to 9 percent in 2011. But when it comes to health care mandates, regulations, and government spending, as well as HSA tax treatment, it s not just about the federal government. These measures and costs also vary state by state and often significantly. So, how do health care policies look state by state, and which states are imposing the greatest costs and which ones the least? The Small Business & Entrepreneurship Council s Health Care Policy Cost Index 2012 ranks the states according to eight policy measures that impact the cost of health care. (All but one of these factors are included in the broader Small Business Survival Index 2011: Ranking the Policy Environment for Entrepreneurship Across the Nation. ) The health care policy measures are: Health Savings Accounts (HSAs). Health Savings Accounts provide much-needed choice, competition and consumer control in the health insurance marketplace. As noted earlier, HSAs are tax-free savings accounts owned and controlled by individuals. Funds can be deposited tax free into the account by the employee, employer or both, and earnings accumulate tax free. The funds are used to cover regular, predictable medical expenses, and each HSA is tied to a traditional catastrophic insurance plan to cover large health care expenditures. Measurement: states providing a tax deduction for individuals making contributions to HSAs or imposing no personal income tax receive a 0, while states not providing a deduction receive a score of 1. 1 Guaranteed Issue for Self-Employed Group of One (GI/SE). Health insurance represents a significant cost for businesses. Taxes, mandates and regulations increase health care costs, increase the number of uninsured, and act as another disincentive to starting up or locating a business in a high-cost state. Guaranteed issue means that individuals may not be turned down for health insurance coverage no matter the condition of their health or risk status. So, incentives 1 Data source: HSAs for America at http://www.health--savings--accounts.com/state-income-tax.htm. 3
for people to purchase health insurance before they become ill are removed. A guaranteed issue mandate raises health care costs, in this case for the self-employed. Measurement: state mandate for guaranteed issue in the self-employed group of one market (state imposing guaranteed issue gets a score of 1 and states not imposing gets a score of 0 ). 2 Community Rating for Small Group Market (CR/SG). Community rating mandates that an insurer charge the same price for everyone in a defined region regardless of their varying health care risks. So, no matter what the risks involved, everybody pays the same price for insurance. That translates into higher costs across the board. Measurement: state mandate for community rating in the small group market (state imposing rate bands gets a score of 0.33 ; state imposing adjusted community rating gets a score of 0.66 ; state imposing pure community rating gets a score of 1 ; and a state not imposing community rating gets a score of 0 ). 3 Guaranteed Issue for Individual Market (GI/Ind). Again, guaranteed issue means that individuals may not be turned down for health insurance coverage no matter the condition of their health or risk status. So, incentives for people to purchase health insurance before they become ill are removed. A guaranteed issue mandate raises health care costs, in this case for the self-employed. Measurement: state mandate for guaranteed issue in the individual market (state imposing guaranteed issue gets a score of 1, for some products a score of 0.5, and states not imposing gets a score of 0 ). 4 Community Rating for Individual Market (CR/Ind). Again, community rating mandates that an insurer charge the same price for everyone in a defined region regardless of their varying health care risks. So, no matter what the risks involved, everybody pays the same price for insurance. That translates into higher costs across the board. Measurement: state mandate for community rating in the small group market (state imposing rate bands gets a score of 0.33 ; state imposing adjusted community rating gets a score of 0.66 ; state imposing pure community rating gets a score of 1 ; and a state not imposing community rating gets a score of 0 ). 5 State High-Risk Pools (HRP). For individuals that cannot get health coverage due to preexisting conditions, some states have set up high-risk pools. According to the Council for 2 Data source: Small Group Health Insurance Market Guaranteed Issue, 2011 from the Henry J. Kaiser Family Foundation at www.statehealthfacts.org. 3 Data source: Small Group Health Insurance Market Rate Restrictions, 2011 from the Henry J. Kaiser Family Foundation at www.statehealthfacts.org. 4 Data source: Individual Market Guaranteed Issue, 2011 from the Henry J. Kaiser Family Foundation at www.statehealthfacts.org. 5 Data source: Individual Market Rate Restrictions, 2011 from the Henry J. Kaiser Family Foundation at www.statehealthfacts.org. 4
Affordable Health insurance, high-risk pools provide a safety net for the medically uninsurable 1% to 2% of the population, who have been denied health insurance coverage because of a pre-existing health condition, or who can only access private coverage that is restricted or has extremely high rates. CAHI notes that state high-risk pools are a much better alternative to providing coverage for the medically uninsurable than imposing guaranteed issue laws on insurers which eventually increase the cost of insurance for everyone. Measurement: states that have high-risk pools receive a score of 0 and states that do not have high-risk pools receive a score of 1. (One caveat: The existence of a high-risk pool in a state does not necessarily mean it is being managed properly.) 6 Number of Mandates. Beyond regulations like guaranteed issue and community rating, state laws impose a host of mandated benefits on insurers. These mandates, while often sounding reasonable, carry real and sometimes significant costs. Health care mandates are easy to impose, as politicians take credit for expanded benefits while denying the related costs. Measurement: number of mandates imposed (state gets a score of 0.05 for each mandate imposed). 7 Per Capita Medicaid Spending. Taxes imposed on entrepreneurs, businesses and consumers are a reflection of the level of government spending. Medicaid spending is a significant cost for taxpayers, whether paid at the state or federal levels. For good measure, as government spends more on a service, in this case health care, the opportunities for waste, fraud, abuse, etc. increase, and spending accelerates faster than it otherwise might due to the incentives at work in government, which can best be summarized as elected officials and their appointees spending other people s money. In the end, as government spends more on health care services, the costs in those services accelerate. Measurement: index of per capita Medicaid expenditures. 8 6 Data Source: State High Risk Programs and Enrollment, January 2010, from the Henry J. Kaiser Family Foundation at www.statehealthfacts.org. 7 Data source: Health Insurance Mandates in the States 2010, by Victoria Craig Bunce and JP Wieske, Council for Affordable Health Insurance, 2010. 8 Data source: 2009 data from the Kaiser Family Foundation at http://www.statehealthfacts.org/comparemaptable.jsp?ind=177&cat=4. 5
Health Care Policy Cost Index State Rankings Rank State HSAs GI/SE CR/SG GI/Ind CR/Ind HRP Mandate Medicaid Index 1 South Carolina 0 0 0.33 0.00 0.00 0.00 1.45 0.93 2.71 2 Iowa 0 0 0.33 0.00 0.33 0.00 1.35 0.82 2.83 3t Indiana 0 0 0.33 0.00 0.00 0.00 1.75 0.77 2.85 3t South Dakota 0 0 0.33 0.00 0.33 0.00 1.45 0.74 2.85 5 Nebraska 0 0 0.33 0.00 0.00 0.00 1.80 0.75 2.88 6 Utah 0 0 0.33 0.50 0.33 0.00 1.25 0.50 2.91 7 Wyoming 0 0 0.33 0.00 0.00 0.00 1.85 0.79 2.97 8 Montana 0 0 0.33 0.00 0.00 0.00 1.90 0.75 2.98 9 Alabama 1 0 0.33 0.00 0.00 0.00 0.95 0.78 3.06 10 Wisconsin 0 0 0.33 0.00 0.00 0.00 1.75 0.99 3.07 11 North Dakota 0 0 0.33 0.00 0.33 0.00 1.70 0.72 3.08 12 Oklahoma 0 0 0.33 0.00 0.00 0.00 1.90 0.89 3.12 13 Kansas 0 0 0.33 0.00 0.00 0.00 2.10 0.72 3.15 14 Alaska 0 0 0.33 0.00 0.00 0.00 1.65 1.28 3.26 15 Tennessee 0 0 0.33 0.00 0.00 0.00 2.05 0.97 3.35 16 Illinois 0 0 0.33 0.00 0.00 0.00 2.30 0.86 3.49 17 Idaho 0 0 0.33 0.50 0.33 1.00 0.65 0.69 3.50 18 Missouri 0 0 0.33 0.00 0.00 0.00 2.10 1.09 3.52 19 Arkansas 0 0 0.33 0.00 0.00 0.00 2.25 1.00 3.58 20 West Virginia 0 0 0.33 0.50 0.00 0.00 1.95 1.10 3.88 21 Mississippi 0 1 0.33 0.00 0.00 0.00 1.45 1.12 3.90 22t Kentucky 0 0 0.33 0.00 0.33 0.00 2.25 1.05 3.96 22t Hawaii 0 1 0.00 0.00 0.00 1.00 1.15 0.81 3.96 24 Arizona 0 0 0.33 0.00 0.00 1.00 1.65 1.14 4.12 25 Texas 0 0 0.33 0.00 0.00 0.00 3.00 0.80 4.13 26 Georgia 0 0 0.33 0.00 0.00 1.00 2.25 0.67 4.25 27 Nevada 0 0 0.33 0.00 0.33 1.00 2.20 0.43 4.29 28 Ohio 0 0 0.33 0.50 0.00 1.00 1.45 1.02 4.30 29 Louisiana 0 0 0.33 0.00 0.33 0.00 2.55 1.21 4.42 30 Virginia 0 0 0.00 0.00 0.00 1.00 2.85 0.61 4.46 New 31 Hampshire 0 1 0.33 0.00 0.33 0.00 2.20 0.84 4.70 32 New Mexico 0 0 0.33 0.00 0.33 0.00 2.85 1.35 4.86 33 North Carolina 0 1 0.33 0.00 0.00 0.00 2.60 1.02 4.95 34t Florida 0 1 0.33 0.00 0.00 0.50 2.45 0.68 4.96 34t Colorado 0 1 0.66 0.00 0.00 0.00 2.70 0.60 4.96 34t Maryland 0 0 0.66 0.00 0.00 0.00 3.35 0.95 4.96 37 Michigan 0 1 0.33 0.50 0.00 1.00 1.25 0.89 4.97 38 Pennsylvania 0 0 0.00 0.00 0.00 1.00 2.85 1.14 4.99 39 Minnesota 0 0 0.33 0.00 0.33 0.00 3.20 1.17 5.03 40t Delaware 0 1 0.33 0.00 0.00 1.00 1.60 1.14 5.07 40t California 1 0 0.33 0.00 0.00 0.00 2.80 0.94 5.07 42 Oregon 0 0 0.66 0.50 0.66 0.00 2.45 0.81 5.08 Dist. of 43 Columbia 1 0 0.00 0.00 0.00 1.00 1.35 2.30 5.65 44 Connecticut 0 1 0.66 0.00 0.00 0.00 2.95 1.42 6.03 45 Washington 0 1 0.66 1.00 0.66 0.00 2.85 0.83 7.00 6
46 New Jersey 1 0 0.66 1.00 0.66 1.00 2.25 0.92 7.49 47 Vermont 0 1 0.66 1.00 0.66 1.00 2.10 1.31 7.73 48 Rhode Island 0 1 0.66 0.50 0.00 1.00 3.45 1.50 8.11 49 Massachusetts 0 1 0.66 1.00 0.66 1.00 2.35 1.60 8.27 50 Maine 0 1 0.66 1.00 0.66 1.00 2.65 1.59 8.56 51 New York 0 0 1.00 1.00 1.00 1.00 2.60 2.14 8.74 Among the 50 states and District of Columbia, the best 15 states in terms of state health care policies are: 1) South Carolina, 2) Iowa, 3t) Indiana, 3t) South Dakota, 5) Nebraska, 6) Utah, 7) Wyoming, 8) Montana, 9) Alabama, 10) Wisconsin, 11) North Dakota, 12) Oklahoma, 13) Kansas, 14) Alaska, and 15) Tennessee. Meanwhile, the worst states are: 34t) Florida, 34t) Colorado, 34t) Maryland, 37) Michigan, 38) Pennsylvania, 39) Minnesota, 40t) Delaware, 40t) California, 42) Oregon, 43) District of Columbia, 44) Connecticut, 45) Washington, 46) New Jersey, 47) Vermont, 48) Rhode Island, 49) Massachusetts, 50) Maine, and 51) New York. In the end, at the federal and state levels, two policy paths exist on the health care front. One is about more government control and interference, and therefore increased costs and diminished care; or the other involves reforms that expand choice and competition for consumers and businesses. Small Business & Entrepreneurship Council 2944 Hunter Mill Road Suite 204 Oakton, VA 22124 Telephone: 703-242-5840 Fax: 703-242-5841 Website: www.sbecouncil.org 7