Mandated Benefit Laws and Employer-Sponsored Health Insurance

Gail A. Jensen, Ph.D.
Department of Economics and Institute of Gerontology
Wayne State University

Michael A. Morrisey, Ph.D.
Lister Hill Center for Health Policy
University of Alabama-Birmingham

January 1999


In 1989, the Health Insurance Association of America (HIAA) published a study entitled The Price of State Mandated Benefits, co-authored by Jon Gabel and Gail A. Jensen. At that time, states had passed more than 700 mandates, most of which required insurers to cover specific diseases or to pay for the services of certain types of providers. The study concluded that mandates raised the price of insurance coverage, discouraged small businesses from providing coverage, and encouraged firms to self-insure. A decade later, HIAA decided to reexamine these issues, although changes in patterns of insurance regulation meant that we would now be examining the effect of federal as well as state mandates.

HIAA again commissioned Gail A. Jensen, Ph.D., of the Department of Economics and Institute of Gerontology, Wayne State University, and Michael A. Morrisey, Ph.D., of the Lister Hill Center for Health Policy, University of Alabama-Birmingham (who had contributed econometric work to the prior study), and asked them to examine the cost and consequences of benefit mandates.

The following are highlights of their study:

• One in five to one in four uninsured Americans lacks coverage because of benefit mandates.

• The number of state mandates increased at least 25-fold between 1970 and 1996.

• Workers pay for mandated benefits in the form of reduced wages or fewer benefits, as well as higher insurance premiums.

• As the number of benefit mandates increases, the cost of coverage rises, and as costs rise, more and more firms seek to self-insure to avoid the added expenses imposed by mandates.

• Given that ERISA preempts self-insured firms from state mandates, the passage of such mandates will not lead to substantially more people with a given benefit. Indeed, a state mandate that applies to private group plans will cover, on average, only 33 percent of a state’s population, whereas one that applies to all private group plans and individually purchased policies will cover about 42 percent of a state’s population.

• Smaller firms are disproportionately affected by mandates in part because they are less likely than larger firms to be able to avoid the costs of mandates by self-insuring. This, in turn, implies that, because health insurance will be more expensive for smaller firms (because they must include the new benefit), they will be less likely to offer coverage to employees.

• Mandates cost money. In Virginia, mandates accounted for 21 percent of health insurance claims; in Maryland, they accounted for 11 to 22 percent of claims; and in Massachusetts, 13 percent of claims.

• Several benefits are particularly expensive. Chemical dependency treatment coverage increases a plan’s premium by 9 percent on average; coverage for a psychiatric hospital stay increases it by 13 percent; coverage for visits to a psychologist increases it by 12 percent; and coverage for routine dental services raised premiums by 15 percent.

The proliferation of mandated benefits has increased the cost of health insurance, disproportionately hurting employees who work for small businesses. But benefit mandates enjoy tremendous political popularity, and serve frequently as central items on the campaign platforms of candidates running for political office. While individually, such benefit mandates may be hotly supported by certain interest groups, the cumulative effect has had a measurably detrimental impact on the ability of Americans to afford health insurance coverage. Policy makers, then, need to be aware that what is politically expedient may come with a high price tag as well as clearly foreseeable harmful consequences for health care consumers.


Currently, well over 1,000 coverage mandates are in place across the country; and state and federal lawmakers give every indication of increasing their involvement in group insurance markets. State legislatures and Congress have passed a wide variety of mandates. Some require that particular types of providers or particular services be covered. Others deal with the guaranteed issue and renewal of policies, waiting periods, and the treatment of pre-existing conditions. More recently, some specify a minimum number of covered hospital days following certain medical procedures, or deal with the nature of the provider networks that managed care firms can establish.

While proponents of these laws believe that they enhance insurance coverage and improve the quality of care, mandates have been shown to increase premiums, and to cause declines in wages (and other fringe benefits); worse yet, mandates lead some workers and employers to forgo insurance coverage altogether. Furthermore, the cost of mandates falls disproportionately on workers in smaller firms, those least able to bear this burden.

Current Scope of Group Insurance Regulation

Both the states and the federal government have enacted requirements for the content of health plans. But there are far more state laws than federal. These state laws include “conventional” mandatory-inclusion and mandatory-option laws that specify particular providers, services, and/or subscriber cohorts, as well as mandates relating to: (1) small-group reform laws, (2) specifics of coverage laws, and (3) provider network laws. (See Table 1.)

Federal statutes affect the applicability of state insurance laws. The Employee Retirement Income Security Act (ERISA) effectively exempts self-insured firms from state insurance regulations. Nearly half (46 percent) of all covered workers are now in self-insured plans [Jensen et al. 1997] that are not subject to state insurance laws. Moreover, the federal HMO Act of 1973 and its amendments of 1988 appear to exempt federally qualified HMOs from some state mandated benefits, although, as Butler [1996] notes, the exemption provision of the HMO Act has yet to be tested in the courts. Many HMOs are federally qualified, and the majority of HMO subscribers are in federally qualified plans.

State Mandates

State governments have been regulating the terms of private health plan coverage by means of mandates for over three decades. These laws initially consisted of mandatory-inclusion provisions. If insurance policies were sold in the state, they had to include coverage for the mandated provider type, service, or subscriber cohort, such as adopted children. Over time, the types of services and providers covered under state mandates for private health plans have grown.

Until the 1970s, nearly all state mandates were mandatory-inclusion laws. Mandatory-option laws began to appear in the early 1970s. The latter require that the insurer offer coverage for particular types of providers or services. Employers, however, have the option of not purchasing this additional coverage.

The trend in conventional mandates enacted across all the states since 1970 is illustrated in Figure 1. The number of state mandates increased at least 25-fold between 1970 and 1996. In 41 benefit areas alone, the number of mandates rose from 35 in 1970 to 860 in 1996.

States vary considerably in their philosophies towards mandates, as indicated by Figure 2. Some states, such as Delaware, Idaho, and Wyoming, have enacted relatively few conventional mandates, while others, such as California, Connecticut, Florida, and New York, have passed more than 25. By and large, states with the most mandates were the ones that got an early start enacting them.

In the late 1980s and early 1990s, states began to legislate newer forms of insurance mandates, attempting to improve the small-group market by specifying particular service obligations within coverages, and delineating the nature of managed care networks.

The extent to which small-group reform statutes were enacted is summarized in Table 2. These mandates typically focused on guaranteed issue and guaranteed renewal, portability of coverage, pre-existing condition clauses, and premium rating restrictions. By 1995, 45 states had enacted one or another of these sets of laws; 36 had enacted them all [Hing and Jensen 1998].

Mandates in the 1990s have included provisions dealing with the coverages offered by managed care plans. Some 19 states currently establish a standard definition of the need for emergency room care. Hospital length-of-stay mandates, which now exist in 35 states, establish minimums for hospital care coverage following certain medical procedures. Gag rules prohibit clauses in the provider contracts of managed care plans that might restrict communication between patients and their physicians; a majority of states (39) now have them [EBRI 1998].

Most states have also enacted one or more laws to regulate the nature of the provider panels created by managed care firms. The best known of these are the any willing provider (AWP) and freedom of choice (FOC) laws, but they also include direct-access laws that allow subscribers to use specific types of in-network specialists without first obtaining a referral from the primary care physician.

The growth and extent of AWP and FOC laws is summarized in Table 3. AWP laws require managed care plans to allow any provider to be included in the network if he or she is willing to abide by the terms and conditions of the network contract. FOC laws require that a managed care subscriber be allowed to step outside the network and obtain services from any licensed provider as long as the subscriber pays a larger amount out-of-pocket. The laws are complex in their application. Some apply only to HMOs, others only to PPOs, but often they apply to both. Laws covering pharmacies were the most common, although AWP laws applicable to physicians existed in 11 states.

Direct access mandates are FOC laws with a twist. They allow subscribers to bypass their physician gatekeepers to see certain types of specialists, but those specialists must be network providers. More than half the states (29) now mandate direct access to obstetricians-gynecologists, and a few mandate direct access to network dermatologists, ophthalmologists, psychiatrists, or chiropractors [EBRI 1998].

Federal Mandates

Whether purchased or self-insured, all plans are subject to several federal mandates, including the 1978 Pregnancy Discrimination Act, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), the 1996 Health Insurance Portability and Accountability Act (HIPAA), the 1996 Mental Health Parity Act, the 1996 Newborns’ and Mothers’ Health Protection Act, and the Women’s Health and Cancer Rights Act of 1998.

With the exception of the recent mental health benefit mandates, the existing federal laws are of the mandatory-inclusion variety. The mental health parity requirements, however, are similar to the newer state mandates that specify specific conditions of service (if the benefit is provided). Moreover, most of the federal mandates were preceded by a large number of state mandates in these same areas of coverage. In most cases, the federal laws represent new mandates for only a minority of states.

The federal mandates are significant in two respects, however. First, they directly amend ERISA to apply to self-insured plans as well as purchased products. Second, they may be a harbinger of the “federalization” of health insurance regulation.

Why Choose to Mandate?

Why have the states and the federal government passed so many laws regulating health insurance? One view of benefit mandates is that they spring from a widespread desire to correct inefficient or inequitable market practices. This so-called “public interest” view holds that health insurance mandates are designed to correct problems in the health care market. Mandates are viewed as an attempt to provide access to coverage or specific treatment practices valued by subscribers but withheld by employers or insurers.

The alternative view of legislation is that the laws and regulations stem from an attempt by self-interested parties to further their private interests. This “public choice” view holds that the passage of insurance mandates is driven by providers of clinical services who want to increase the demand for their services or thwart the ability of their rivals to achieve a competitive advantage. Passage of mandates may also be driven by patient advocacy groups (e.g., those representing persons needing certain services) who want to lower the out-of-pocket costs for certain services. By requiring coverage of the service, its net price is reduced, and so more people utilize the service. In general, proponents of mandates are special interest groups that stand to personally bene fit from the laws

As for legislators, they trade their support for mandates for political support—votes, publicity, campaign contributions—from core constituencies that have a stake in the enactment of a mandate. Thus, legislative benefits accrue to relatively small groups of people who are deeply committed to a particular issue. Costs, on the other hand, are spread across a broad majority. Thus, proposed legislation would generally have a very large, direct financial impact on providers or suppliers of goods or services, while the impact on purchasers would be diffused over a much larger group of individuals.

Providers also find it easier to organize than would consumers in general. As a result, the primary proponents and opponents of legislation tend to be providers or suppliers, whose gains or losses are large enough to warrant the costs of political action. In the health care field, provider groups have been the primary proponents of legislation.

The direct evidence with respect to the enactment of insurance mandates is thin but is generally consistent with the view that the laws reflect provider efforts. There is a much wider literature on health legislation that reaches the same general conclusion.

The Economics of Mandates and Employer-Sponsored Health Insurance

Most people who purchase health insurance in the United States do so through their employer. Workers value health insurance, and it is less expensive when purchased through an employer than when purchased individually. There are three reasons for this. First, federal and state tax codes do not treat health insurance as taxable income. Second, employed individuals are generally healthier than those who are not, and are therefore likely to file fewer claims and have lower costs. Finally, administrative costs on a per-individual basis are lower when coverage is purchased through an employer.

People generally are paid what they are worth. Strictly speaking, they are paid the value of the output they produce. Workers can be paid in a variety of ways: wages; wages and a pension; wages, health insurance, and parking; and so on. However, the total cost of the compensation package can’t exceed the value of the worker to the firm. If health insurance is to be part of the compensation package, some other element of the package must be reduced.

Employers will offer health insurance only if workers value it. Workers must give up wages or other benefits in return for the health insurance coverage. If they don’t value the coverage, they might be better off working for a firm that offers only wages (or other benefits that workers value more).

Economics suggests that employers will offer health insurance plans that are valued by their workers, with coverages that reflect the preferences of the employees. If not, employers will have to compensate by raising wages or other benefit levels, or the workers may become dissatisfied and decide to work elsewhere.

Given all this, the economics of insurance mandates are straightforward. Suppose a new coverage, say for eyeglasses, is mandated in all plans. Obviously, if a firm already offers the coverage, then the mandate has no effect on that employer. Labor and insurance market effects occur only when the mandate requires coverage that employers don’t offer voluntarily because workers don’t place a high value on it.

The new coverage will raise the cost of insurance. The labor market will adjust to reflect the additional cost. Wages may be reduced to pay for the new benefit, or other, non-mandated benefits may be eliminated. In a smoothly functioning labor market, workers necessarily bear the cost in one form or another. They now have to pay for an eyeglasses benefit that they previously didn’t value enough to pay for. This is the first consequence of a mandate: Wages, other health benefits, or non-health benefits will be reduced to pay for the new coverage.

Proponents of mandated benefits argue that the new coverage benefits workers. But this “benefit” comes with higher premiums. The burden of the mandate to workers, then, is the cost of the coverage over and above what they were willing to pay for it in the absence of a mandate.

It may be that workers will find the new insurance/wage package unattractive. This will lead them to look for an employer that does not offer the new coverage, or to find an employer that does not offer health insurance at all. This leads to the second consequence of mandates: Employees will have an incentive to seek out firms that do not offer coverage, or to drop coverage entirely, if the cost to them of the mandate is sufficiently high.

The employer has another option to try to mitigate the effect of the mandate. ERISA exempts self-insured plans from the reach of state insurance laws. This is the third consequence of mandates: Firms will seek to become self-insured to avoid the costs of the mandated coverage faced by their workers.

The ability to self-insure under ERISA has other implications for labor and insurance markets. This leads to the fourth consequence of mandates: In the presence of ERISA, a state mandate will not necessarily lead to substantially more people with the covered benefit. Many will be excluded by virtue of coverage through self-insured plans, and others will move to self-insured firms. (More federal mandates would effectively deny such firms some of the advantages of self-insuring.)

Self-insurance is not equally costly for all employers. When a firm self-insures, it becomes its own risk pool. Insurance risk declines as the size of the insurance pool grows. Therefore, smaller employers will face more risk in self-insuring than will larger firms. Thus, the fifth consequence of mandates is: Small employers will be disproportionately affected by virtue of being less able to avoid the mandate by self-insuring. This, in turn, implies that health insurance will be more expensive for small firms (because they must include the new benefit), and they will be more likely not to offer insurance. They will also tend to attract workers who value insurance coverage the least. Obviously, federal mandates are likely to have greater implications for the wage-benefit trade-off than state mandates because the federal mandates apply to self-insured plans as well.

These employer-labor market effects apply to all mandatory-inclusion laws. Mandatory-option laws have decidedly fewer effects because the firm is free to include or exclude the coverages as it chooses.

Laws that apply to only one type of insurer have additional effects because they change the attractiveness of one type of plan relative to another. AWP or FOC laws or gag rules that apply only to PPOs, for example, will raise premiums for PPOs relative to conventional plans, HMOs, and point-of-service plans. This is the final consequence of the economics of mandates: Laws that restrict only particular types of plans will reduce the attractiveness of those plans.

Evidence of the Effects of Mandates

Who Is Affected by Mandates?

Most federal mandates cover all group health plans, whether self-insured or purchased, but some exclude certain plans from compliance. Sixty-one percent of Americans are covered by private group health insurance, and the majority of these people are entitled to most federally mandated benefits. (Medicare, Medicaid, and other government plans, as well as individually purchased policies, are excluded from compliance with most federal mandates. Some federal mandates, such as COBRA and the Mental Health Parity Act, also exclude small employers.)

In contrast, under a state mandate, a large majority of a state’s population is unaffected because the laws apply only to purchased conventional, PPO, and POS plans, and HMOs. A state mandate does not cover persons who lack employer coverage to begin with; who are covered only by Medicare, Medicaid, or another government program; or who are covered by a self-insured group plan. A state mandate that applies to private group plans will cover, on average, only 33 percent of a state’s population, whereas one that applies to all private group plans and individually purchased policies will cover about 42 percent of a state’s population.

The numbers are low for several reasons. First, 30 percent of the population has Medicare, Medicaid, some other public coverage, or no coverage at all. These people are not subject to state mandates. Second, even among persons who have private coverage (70 percent), most of this coverage is beyond the reach of state laws. Nine percent have individual coverage. While state laws specify the nature of these individual insurance policies, they are typically not affected by group mandates.

Further, among all persons with private group coverage in 1995 (61 percent), 63 percent of conventional plan enrollees, 60 percent of PPO plan enrollees, 53 percent of POS plan enrollees, and 10 percent of HMO enrollees were in self-insured plans.

Of the 33 to 42 percent of persons in plans subject to state mandates, only those who were not already receiving the benefit gain access to it as a result of a new mandate law. These people are typically workers and their families participating in plans offered by smaller firms. This is because most small-firm coverage is insured (and thus subject to state mandates), and because insurance benefits offered by small firms tend not to be as rich as those offered by large firms [Jensen et al. 1997].

Of course, any failure to enforce state mandates would reduce their effectiveness even further. Thus, while one might assume that state mandates affect the preponderance of a state’s population, in reality the opposite is closer to the truth. Less than half of a state’s population is in plans affected by state mandates.

What Do Mandates Cost?

The full costs of mandated benefits include not only the additional premiums, but also the consequent changes in access to health insurance, the nature of coverage, workers’ compensation, and possibly even a firm’s hiring practices.

In this section, however, our focus is on the more narrow notion of costs, namely, the extra premiums due to mandated coverages. These are important in their own right because it is the consequent changes in the cost of insurance that give rise to costs in other arenas. If premium increases are negligible, we can expect few other costs, whereas if they are large, other costs, too, are likely to be substantial.

In the case of state mandates, data on insurance claims in a state can be used to calculate the share of insurance claims associated with mandates. Using this method, mandated benefits in Virginia were found to account for 21 percent of claims; in Maryland, 11 to 22 percent of claims; in Massachusetts, 13 percent of claims; in Idaho, 5 percent of claims; and in Iowa, 5 percent of claims.

These estimates, however, are not a measure of the premium cost of mandates. The full share of claims cannot be attributed to mandates because some of the coverages likely would have been provided anyway. The more appropriate measure is the “marginal cost” of mandates, which is the difference between actual costs and the costs that would have resulted without the mandates. Using a nationwide cross-section of insured firms in 1989, Acs et al. [1992] found that mandates significantly raised premiums. Among firms that offered health insurance, premiums were found to be 4 to 13 percent higher as a direct result of state mandated benefits.

Jensen and Morrisey [1990] provided information on the marginal cost of including specific types of coverage based on the actual experience of plans, which is also useful in gauging the cost of mandates. Several benefits, which many states have mandated, were found to be expensive. Chemical dependency treatment coverage increased a plan’s premium by 9 percent on average. Coverage for a psychiatric hospital stay increased it by 13 percent. Adding benefits for psychologists’ visits increased it by 12 percent, and adding benefits for routine dental services increased it by 15 percent. These estimates may slightly overstate the cost to an employer of complying with a new mandate in one of these areas because the sample of firms used in the study offered very generous benefits all around, and may have offered better coverage than a state would typically prescribe. The estimates nonetheless suggest that mandates can be expensive for firms that otherwise would not offer these coverages.

A survey conducted each spring by Charles D. Spencer & Associates, Inc., covering 1.4 million workers in approximately 200 firms, has consistently found that persons who elect COBRA coverage cost much more to insure than active workers. Average claims per COBRA enrollee in 1996, for example, were 68 percent higher than average claims per active worker ($5,591 vs. $3,332) [Huth 1997]. This is not a one-time finding, but rather one that has held up for years. (See Figure 3.) Workers, through their employers, are clearly paying a huge subsidy for each continuation enrollee, and such adverse selection is bound to raise group premiums. Since COBRA enrollees on average comprise 2.2 percent of all plan enrollees [Huth 1997], premiums per normal enrollee are 4 percent higher than they would be were it not for the COBRA mandate.

COBRA also imposes administrative costs on a firm, including the costs of communicating continuation rights to eligible individuals, collecting premiums from these enrollees, and, in some cases, monitoring their right to continued eligibility. Although probably small in relation to incremental premiums, the administrative costs are still significant. Estimates for 1990, for example, were in the range of $150 to $240 annually per COBRA enrollee [Charles D. Spencer & Associates, Inc., 1990].

Are Wages Reduced as a Result of Mandates?

A key result of the economics of employer-sponsored health insurance is that workers pay for the coverage in the form of reduced wages or fewer benefits.

Recent research on workers’ compensation insurance suggests that wages are lower in the presence of other benefits. These studies are particularly important because, like health insurance mandates, workers’ compensation coverage is mandated by state law. In these studies, researchers were able to carefully account for the size of the benefits received if a person were injured, and they used particularly good measures of the risk of injury. Gruber and Krueger [1991] found that over 86 percent of the costs associated with workers’ compensation were borne by workers in the form of lower wages. Viscusi and Moore [1987] concluded that all the costs were borne by workers.

The only study examining the effects of health insurance mandates on workers’ wages is that of Gruber [1994]. He examined the effects of state maternity mandates implemented in 1976-1977 in Illinois, New Jersey, and New York, prior to the federal mandate. His results indicated that the full cost of the mandates was paid by women ages 20 to 40. The difference in wages of married women ages 20 to 40, for example, was 4.3 percent lower in Illinois, New Jersey, and New York after the mandate than they were for similar women in the control states over the same period. This is dramatic evidence that workers pay for the cost of mandates in the form of lower wages.

Do Some Workers Lose Coverage as a Result of Mandates?

If mandates increase the cost of coverage, it is possible that some buyers, whether firms or individuals, will decide that health insurance simply isn’t worth it, in which case the number of purchasers will decline.

Using data from 1989 to 1994, Sloan and Conover [1998] found that the higher the number of coverage requirements placed on plans, the higher the probability that an individual was uninsured, and the lower the probability of people having any private coverage, including group coverage. The probability that an adult was uninsured rose significantly with each mandate present. Because their analysis had exceptionally high statistical power—it included more than 100,000 observations—these findings are quite persuasive.

These results suggest that eliminating benefit mandates entirely would reduce the proportion of uninsured adults by approximately four percentage points, i.e., from 18 to 14 percent of the non-elderly population. This implies that one-fifth to one-quarter of the uninsured problem is due to the presence of state mandates. The study’s findings confirm those of an earlier study by Goodman and Musgrave [1987], who estimated that, in 1986, 14 percent of the uninsured nationwide lacked coverage because of mandates.

Have Mandates Encouraged Firms to Self-Insure?

Since ERISA exempts self-insured plans from state regulation, it is conceivable that state-mandated benefits have spurred some firms to self-insure as a way of avoiding coverage requirements. The importance of mandates in self-insurance decisions has been the subject of several studies. Jensen et al. [1995] estimated the impact of state mandatory-inclusion mandates on the decisions of mid- to large-sized firms (50 or more workers) to convert to self-insurance during the early and mid-1980s. Most mandated benefits had a positive but statistically insignificant effect on the likelihood of conversion. Even when considered collectively, mandates did not explain conversions to self-insurance that occurred between 1981 and 1984/85, nor those that occurred between 1984 and 1987.

Greater premium taxation of purchased plans, however, was found to strongly encourage self-insurance. Both premium taxes and state risk-pool taxes were found to have significant effects on the likelihood of converting. Between 1981 and 1984/85, the presence of a state continuation-of-coverage requirement also encouraged self-insurance but was not a factor for the later period examined. One interpretation is that when COBRA took effect in early 1986, self-insurance was no longer a way to avoid offering continuation rights. As noted earlier, continuation benefits have been found to raise premiums substantially (e.g., by 4 percent).

Do Mandates Disproportionately Affect Small Firms?

Mandates have increased the uninsured population, priced some small firms out of the group market altogether, and forced workers to go uninsured or buy coverage on their own. Jensen and Morrisey [forthcoming] document the effects of the laws on small firm coverage over the 1989–1995 period for firms with fewer than 50 workers. Each additional mandate significantly lowered their probability of offering health insurance. The findings suggest that eliminating all mandates would have raised the proportion of small firms that offered coverage by 9.4 percentage points, or from 49 percent to 58.3 percent. Small firms that would sponsor coverage, were it not for the presence of mandates, comprise 18 percent of all uninsured small businesses.

In an earlier study [1992], Jensen and Gabel examined the separate effects of different types of benefit mandates on small firms’ decisions to offer coverage. Although most individual mandates had negligible effects, Jensen and Gabel found that, even in the mid-1980s, state mandates accounted for 19 percent of non-coverage among small firms. The most troublesome mandates were state continuation-of-coverage rules. These pre-COBRA state mandates allowed terminated workers to buy into the firm’s plan. Continuation mandates have been found to give rise to acute adverse selection and, hence, to raise premiums. This finding suggests that, in small firms, which typically have high worker turnover, these effects may be especially severe.

However, Uccello [1996] and Jensen and Morrisey [forthcoming] found that small firms were no less likely to offer coverage in states with pre-existing condition mandates. One explanation is that problems with insurer restrictions on the coverage of pre-existing conditions were never widespread to begin with, so the laws, in effect, were “non-binding” limits. Indeed, for years the coverage of pre-existing conditions in the small-group market has been about the same as in the large-group market [Jensen and Morrisey 1998].


Four conclusions emerge. First, both conventional mandates specifying coverage for particular provider types and services, and newer mandates affecting small-employer markets and managed care plans have expanded dramatically at the state level during the 1980s and 1990s. Federal laws regulating the nature of health coverage have also grown. While many of the federal measures have tended to mimic similar state laws already in place, the federal laws potentially have a larger impact because they affect the coverage of the approximately 43 percent of workers who are enrolled in self-insured plans. Moreover, it appears that health insurance legislation may be becoming federalized as Congress considers even more coverage mandates.

Second, most state mandates affect less than half of the state’s population. Thus, state efforts to increase access to particular benefits can have only limited success. Moreover, the effect of the laws falls disproportionately on workers in small firms because these firms are less able to self-insure and avoid the consequences of the mandates.

Third, mandated benefit laws do have negative effects. This is particularly true of the conventional mandates that have required inclusion of specific benefit provisions. Recent work indicates that a fifth to a quarter of the uninsured have no coverage because of state mandates. Federal mandates are likely to have even larger effects.

Finally, and perhaps most important, workers pay for health insurance mandates in the form of reduced wages or fewer benefits. If insurance plans are required to expand benefits or remove cost-containment devices, premiums rise. Workers and their employers may be able to avoid some of these costs by switching to less desirable plans or by self-insuring. To the extent that they cannot, wages or other forms of compensation must fall.

Mandates are attractive. Their proponents argue that they guarantee access to particular coverages, expand benefits, and enhance quality. More than that, they are off-budget. The costs don’t appear as explicit items in state or federal budgets. However, mandates are not free. They are paid for by workers and their dependents, who receive lower wages or lose coverage altogether.


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