Opinion: Daily Journal

When Regulations Boomerang

RALEIGH – Whenever we free-market types warn of “unintended consequences,” our critics accuse us of obfuscation. For example, we might argue that, in an attempt to aid those of modest incomes to afford housing, rent control actually prevents many families from finding a decent place to live by interrupting natural market forces and reducing the incentive for landlords and developers to invest in new and renovated units. Many think this kind of analysis to be convoluted or, worse, dishonest. “You are trying to make complicated what is really quite simple,” they typically say.

But I follow the advice of mathematician and philosopher Alfred North Whitehead: “Seek simplicity – and distrust it.”

The latest example of how government regulation can have unintended and counterproductive affects can be found in the realm of health insurance. North Carolina, like other states, has been subject to intense debate in recent years about so-called “mental health parity.” The argument is that health insurers are not as willing to pay for medical treatment for mental disorders as they are for physical ones, thus biasing the system. It is a plausible case, on the surface. Surely, one could imagine, it is far easier for insurers and even medical providers to take seriously a disease or injury with a physical manifestation rather than one stemming from biochemical or psychological causes. But are ignorance and greed the explanations for the difference in coverage?

Consider a recent report by Forbes magazine. According to reporter Ira Carnahan, 34 states now mandate mental-health parity in insurance coverage. These laws generally make it illegal for an employer who offers coverage for physical conditions like appendicitis, for example, to offer less coverage for mental problems. There is also a federal law requiring that lifetime caps on coverage must be the same for each category.

But the problem is that while someone filing a claim for an appendectomy cannot return the next year with another appendectomy claim, he can file for more therapist treatments. So people use four times as many mental health services when someone else is picking up the costs as they do when they are paying the bill directly, according to a study in the Journal of Health Economics.

Remember: employees pay most of their bill for health care, one way or the other. Either they pay cash or their cash wages are reduced in order for employers to pay insurance premiums. What really matters is the structure of incentives presented to patients. If they pay providers directly, they tend to shop around and consume care more efficiently. If there is little or no formal cost-sharing, patients tend to overconsume.

Carnahan reports that in the parity states, employers are reacting in ways designed to minimize the impact on health costs, such as instituting tighter forms of managed care and otherwise restricting access to doctors for everyone. Rather than paying directly for mental health services, patients are paying indirectly in the form of hassle (and lower wages, to the extent employers cannot restrain cost inflation).

The upshot is that over the past decade, mental health spending, as a percentage of total health spending, has dropped. Carnahan quotes experts who say the parity laws have backfired. Presumably, that is an unintended consequence. But, hey, at least we are making health care more bureaucratic and costly for everyone – gotta maintain that parity, you know.