Corporate & Securities Law

Here Come the Price Controls

As Todd mentioned, the Obama Administration has released its latest plan for regulating (and mandating) health insurance. The new plan includes a novel element: the creation of a seven-member Health Insurance Rate Authority that would issue an annual schedule of “reasonable” rate increases. Increases deemed unjustified could be blocked, and insurers that imposed unjustified rate increases would have to provide rebates to overcharged consumers.

This is, of course, an old-fashioned price control. The sort the Nixon and Ford Administrations imposed, with a spectacular lack of success, on gasoline markets in the 1970s. The sort that either has no effect (if the rate regulators set the maximum price at or above the market-clearing rate) or causes shortages and/or service cuts (if the rate regulators set the maximum price below the market-clearing rate). The sort that wins short-term political points because it sounds good to lots of well-meaning folks who are too busy living their lives to worry about the unintended consequences their elected representatives are supposed to be considering.

The Obama Administration included this added feature in its new health insurance proposal because some health insurers — most prominently, Wellpoint’s Anthem Blue Cross — have recently raised premiums on individual (as opposed to employer-provided) policies. Ironically, other features of the Obama proposal would encourage all insurers to follow Anthem’s lead.

Anthem raised premiums on individually purchased policies because the current economic downturn has motivated many of its customers who ascribe a relatively low value to insurance coverage — in general, its healthiest policy holders — to drop their insurance coverage. As these healthier customers have dropped out of the pool of insureds, Anthem’s average policyholder has become less healthy and more likely to make claims. To deal with that change in its risk pool, Anthem has had to raise premiums.

This “drive out the healthy folks” dynamic will occur in spades if the Obama plan becomes law. That’s because the plan’s elimination of pre-existing condition prohibitions, coupled with its lax penalties for not carrying health insurance, will incentivize a huge percentage of healthy people who buy their own insurance to drop it until it’s needed.

Suppose you’re a 27 year-old man living in Columbia, Missouri (65203 ZIP Code) earning $40,000 a year. To buy a health insurance policy with a $1,000 deductible (which is susbtantially higher than the average deductible for employer-provided insurance), you’d have to pay $187.84 per month, or $2,254.08 per year. (Price data are from this website.) Now, if the law prohibits insurers from denying you or charging you extra for a pre-existing condition, you could hold off buying that insurance policy until you get sick and need it. Under the Obama plan, you’d have to pay a maximum penalty of $1,000 (2.5% of your income) if you forego coverage.

So what are you going to do? Pay an extra $1,254 to ensure that you’re covered for any expense greater than $1,000, or pocket that money and take the risk that you might have to pay out-of-pocket for some expenses you incur before you have a chance to buy insurance from a company that can’t penalize you for a pre-existing condition?

Lots of folks will take the latter option. And guess who those folks will be? Young, healthy people.

Once those people drop their insurance, the cost of covering the people remaining in the risk pool will rise. And as those costs rise, premiums will follow. As premiums rise, the amount one can save by dropping one’s coverage — i.e., one’s “payment” for taking the risk of some uninsured loss — will grow. This will lead even more healthy people to drop their insurance and will drive costs and premiums higher still.

Of course, the government could use force to stop premium hikes, and the new Obama proposal seems to authorize such coercion. But even brute force has its limits. If the Health Insurance Rate Authority refuses to allow the premium increases necessary to cover an ever unhealthier risk pool, it will eventually drive private insurers out of business, leaving only the government as insurer of last resort.

But perhaps that was the goal all along.

Full post as published by Truth on the Market on February 23, 2010 (boomark / email).