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The effect of state mandates on health insurance premiums.

Article Excerpt
I. Introduction

State health insurance mandates require insurers to offer policy holders coverage for specified benefits, providers, or patient populations (Bunce, Wieske, and Prikazsky, 2004). Although some individuals may benefit from additional coverage, mandated benefits are not costless. The costs of mandates are borne by both the insurance companies and the insured, and these costs are reflected in insurance premiums. A better understanding of how mandates affect costs may lead to more informed policy decisions.

The recent availability of premium data from sources such as ehealthinsurance.com makes it easier to study the effects of state mandates on insurance premiums. For example, New (2006) uses data from ehealthinsurance.com to examine how various state laws affect premiums of identical health plans in 36 states. He finds that states with greater than 26 mandates have monthly premiums that are about $24 higher than states with fewer laws. However, if some mandates reduce premiums, a more appropriate measure would be the number of mandates that increase premiums. New also finds that direct access to specialists increases monthly premiums by $28.50.

Although other studies have examined the impact of state mandates on insurance premiums, New's study is the most comprehensive because he examines the same policies in 36 states. Congdon, Kowalski and Showlater (2005) use the ehealthinsurance.com data to examine the effect of the number of mandated benefits, any-willing-provider laws, community ratings, and guaranteed issue on premiums. They find that any-willing-provider laws increase premiums by about 1.5 percent. Community ratings increase individual premiums by 20.3 percent, and guaranteed issue increases premiums by 114.5 percent. Although the Congdon et al. study holds coinsurance rates and deductibles constant, it is not appropriate to compare different plans across states. A more appropriate method is to compare the same plan across states (New, 2006).

In this paper we estimate the effect of health insurance mandates on insurance premiums using a data set that compares paired differences in premiums in metropolitan and micropolitan statistical areas that border state lines. Our data set consists of all plans in each border city. This allows us to parse the data in a way similar to Congdon et al. (2005) and New (2006) so that a comparison of our results to theirs is possible. To be consistent with the methodology of Congdon et al. (2005), we compare all plans in the data set across states. New's (2006) methodology compares the same plans across states. Our methodology allows us to use differences in paired premiums to remove plan and population characteristics, leaving only differences in premiums arising from differences in state mandates. We also use our results to predict the effect of various mandates on the probability of being insured for self-insured individuals and single individuals working for small firms.

II. Literature Review

The impact of mandates on costs may be large, especially if secondary effects for the individual and the firm are considered. For example, insurance premiums have been found to be a significant determinant of whether an individual has insurance coverage (Chernew, Cutler, and Keenan, 2005), the decision to remain on the job (Madrian, 1994), as well as the return to entrepreneurship (Hamilton, 2000). Additionally, small employers--those with fewer than 50 employees--are only half as likely as larger employers to offer insurance. One important distinction between large and small firms is that larger employers usually self-insure and therefore are not subject to state mandates. Smaller employers frequently purchase their insurance from private insurers. These insurers are subject to state regulations and mandates that do not apply to self-insured companies. As a result, the health insurance provided to small employers is subject to both state and federal mandates (United States GAO, 2003). If these mandates increase health insurance premiums, smaller employers may be less likely to offer health insurance or it may determine the type of employees they can hire.

The number of mandates within states has grown dramatically. In 1970, the total number of mandates in all states was 35. The number of mandates increased to 860 by 1996 (Jenson and Morrisey, 1999) and exceeded 1,831 by 2006 (Bunce, Wieske, and Prikazsky, 2004).1 Bunce, Wieske, and Prikazsky find that the number of mandates ranges from a low of 13 in Idaho to a high of 60 in Maryland. They estimate that the mandates for dentists and for in-vitro fertilization increase premiums by 3...

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