Is fine big enough to ensure coverage?

Healthcare reformers tell a wry joke about one of their number who, called to heaven, is given the opportunity to pose a single question to God.

"Will we ever have universal health coverage in the United States?" the reformer asks.

"Yes," comes the answer from on high, "but not in my lifetime."

The simple truth implicit in this joke is underscored by the landmark healthcare bill passed this week by the Senate Finance Committee: America is walking up the driveway of universal coverage, but hasn't yet made it through the door.

It also reflects the one important truth buried within the insurance industry's oafish assault on healthcare reform via a consultant's study claiming that the bill by Senate Finance Committee Chairman Max Baucus (D-Mont.) would drive premiums much higher than they would be under current law. The study observes, accurately, that the bill's weak enforcement of its mandate that all Americans buy insurance will undermine efforts to restrain health costs.

Since its release Sunday, the report prepared by PricewaterhouseCoopers for the health insurance lobby has been widely vilified. Among the criticisms: It ignores numerous provisions in the bill aimed at reducing premiums.

"They blew it," Jonathan Gruber, a healthcare economist at Massachusetts Institute of Technology, told me this week. "If they'd said premiums will be much higher than they would be under the original Baucus proposal, that would be valid. But they said premiums in the Baucus bill will be much higher than they are today, and that's just wrong. Even under the current version, they'll be lower than they are today."

Yet the report was correct in identifying the bill's "weak coverage requirement" as a flaw.

What's at issue is the individual mandate -- the requirement that all Americans have health coverage, a central provision in the Baucus bill and other congressional proposals with which it is likely to be melded as the reform debate proceeds. Baucus enforces the mandate by imposing a financial penalty of up to $750 per adult in households without coverage. (To compensate, the bill subsidizes premiums for those earning up to four times the federal poverty limit, starting in 2013.)

Is a penalty of $750 per adult enough to overcome the resistance of someone facing the expenditure of $5,000 for an individual or $14,700 for a family, even counting the benefits of health coverage? (The figures are projections by the Congressional Budget Office for mid-range policies in 2016.)

Many economists don't think so. They prefer Baucus' original figure -- a maximum of $950 per adult or dependent, with a cap of $3,800 per family, which he reduced in a fruitless effort to get conservatives on board the reform train. Indeed, the CBO estimates that the penalties and subsidies in the Baucus bill would cut the uninsured population by slightly more than half by 2019, leaving 25 million persons still without coverage.

There's little doubt that a higher penalty successfully drives more people to take insurance. The best evidence comes from Massachusetts, which enacted an insurance mandate in 2006.

In the first year, when the penalty for violating the mandate was only $219, the ratio of those uninsured dropped only modestly, to 5.7% of residents from 6.4%. But it fell sharply in 2008 as the penalty rose to a maximum of $1,068, or half the premium of the minimum qualifying health coverage. By the end of that year the state's uninsured ratio was only 2.6%, representing a gain of 421,000 insured people.

"The size of the penalty is definitely an issue," acknowledges Len Nichols, an economist at the New America Foundation in Washington. "Would I like to have stronger penalties and higher subsidies? Hell yes. We would all prefer airtight, no-exemption, 100% coverage."

Why is the individual mandate important? Those most inclined to voluntarily forgo insurance are the young and healthy -- "young invincibles" is the industry term. Their underuse of healthcare, on average, subsidizes the older and sicker enrollees in the insurance pool. (As they grow older, of course, they benefit from the same phenomenon.)

Allowing this group to remain outside the insurance pool means that older and sicker customers become overconcentrated among policyholders, which forces premiums higher. There's no point in blaming insurance companies for this trend -- it's what comes naturally to commercial entities trying to preserve their profit margins in the face of higher costs.

As premiums creep higher, insurance becomes more unaffordable for more people, and more drop out of the pool, which forces premiums even higher, and so on. The only options for fighting the trend are to defray higher premiums with greater subsidies, which raises government costs, or expand the customer pool through an ironclad mandate, paired with regulations to keep the insurance industry from exploiting its captive clientele.

Through its lobbying arm, AHIP, or America's Health Insurance Plans, the insurance industry had signaled that it would accept the latter bargain -- tighter regulations (such as a ban on excluding people with preexisting medical conditions) in return for a universal mandate.

By provocatively releasing its report on the eve of the Baucus committee's vote, AHIP gave suspicious lawmakers a pretext for abandoning that bargain. There's less now to keep liberals in Congress from tightening regulations on the industry even more and, for centrists, less of a rationale for raising the mandated penalties and increasing premium subsidies, if that looks like a giveaway to corporate barons.

"Because they so exaggerated the negative, AHIP's point got lost," Nichols says. "They could have gotten a coalition to demand more generous subsidies. . . . They chased away what friends they might have had."

While the result will hurt the industry, it may hurt the entire reform program even more. MIT's Gruber says the Massachusetts program was backed by broad political consensus, allowing it to keep its penalties for noninsurance relatively low.

"You're not going to have that nationally," he says, foreseeing that reform opponents will mount campaigns urging Americans to "stick it to the government" by shunning insurance. To counter that pressure, Gruber says, penalties for noncompliance may have to be stronger.

It will also be important for Congress to keep its eye on the ball of inclusiveness. Bringing as many Americans as possible into the insurance system, after all, is the only way to ensure that we get healthcare reform -- in our lifetimes.

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Michael Hiltzik's column appears Mondays and Thursdays. Reach him at michael.hiltzik@latimes.com, read previous columns at www.latimes.com/hiltzik, and follow @latimeshiltzik on Twitter.

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