The Bad Road To Baucus

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http://spectator.org/archives/2009/10/20/the-road-to-baucus

The Bad Road to Baucus

By William Tucker on 10.20.09 @ 6:09AM

Without any idea what it is doing, Congress is about to pulverize the American medical system, put the health insurance companies out of business, and set the federal budget on a runaway course that may end up wrecking the entire economy.

So if you'd like to know why all this is happening, here's a brief review:

The "crisis" in health insurance exists because the government is already mismanaging the system. The problem began in 1945 when Congress passed the McCarran-Ferguson Act. Even though insurance had long been sold across state lines, the states were allowed to regulate, with the benign neglect of the federal government, under the fiction that insurance was not "commerce." This ended with a 1943 Supreme Court decision that ruled insurance was indeed "commerce." The Court said Congress could delegate its interstate commerce powers to the states, however, and Congress did just that, exempting insurance from federal anti-trust law and giving the states precedence. As a result, there is no national insurance market, only 50 state markets, each with its own licensing and regulatory procedures.

Now there is plenty of reason to regulate insurance. One of the most common scams is for a company to come into a neighborhood, start selling insurance, pay the first claims on a Ponzi basis, and then skip town when the real claims start coming in. It happened again just last month on Long Island. Someone must carefully monitor reserves and make sure companies are capable of backing up their responsibilities.

Given this authority, however, the states have reverted to the old game of favoring big players by setting up barriers to competition. In many states, Blue Cross/Blue Shield holds 80 percent of the market and can set prices pretty much at will. Aggravating the situation is the enthusiasm of state legislatures for writing their own insurance policies through mandates. Health providers of practices such as chiropractic, nutritional therapy and pastoral counseling pressure the legislature to require coverage in all policies, even when consumers don't want it. By the time the lawmakers are through, insurance usually costs anywhere from 20 to 40 percent more than without mandates.

Thus, the "insurance crisis" would have emerged long ago except that a large portion of the population -- more than 60 percent, in fact -- has been able to get around the restrictions. Nearly all the major corporations and their unionized employees have done this through the Employee Retirement Income Security Act of 1973 -- "ERISA."

ERISA says that if large employers self-insure, they are exempt from state regulations. This is only possible for corporations with 300 or more employees, since you need a large pool to spread health risks. ERISA plans grew rapidly during the 1970s and 1980s, encouraged by an IRS decision that such benefits should be tax-free. Pumping up benefits became a much more efficient way of compensating employees than raising wages.

As a result, the healthcare system was soon flooded with union members carrying "first-dollar" coverage from their employers and wildly spending other people's money. This drove up demand. On the other hand, ERISA plans had an easy time in kicking people out if they got really sick. Their responsibility, the law said, was to the plan, not to individuals.

Hillary Clinton got word of all this and declared a "healthcare crisis" but never really diagnosed the problem. She told ERISA horror stories to convince people the insurance companies were acting irresponsibly. But insurance companies were prevented from acting arbitrarily by state laws. ERISA plans could be highhanded because they were exempt from state laws.

The ERISA system, however, created other problems:

1. You couldn't take your insurance with you if you left your job.

2. Smaller companies couldn't self-insure because they didn't have enough employees to spread the risk.

Misinterpreting all this, Clinton nevertheless decided to "solve" the problem by mandating that smaller companies also provide insurance for their employees. When told that many small businesses and start-ups couldn't afford this, she responded, "I don't have time to be concerned about every underfunded entrepreneur in America." That was indeed the problem.

Clinton's effort failed from public opposition. In the meantime, many smaller companies began buying insurance for their employees anyway, swallowing the costs. This created a secondary market for private insurance, although employers assume much of the cost. According to experts, the market for the 85 percent of people now covered by insurance or health benefits is now evenly split in three parts: