Would ObamaCare Control Health Insurance Premium Costs?
In response to California health insurer's proposed 39 percent hike in individual market premiums, Paul Krugman is saying that health care reform is necessary to control such massive insurance price hikes. The administration is saying as much too, even preparing a quick-and-dirty memo on premium spikes across the country.
Here's the problem with that claim: Premium increases in the California market are likely due to a combination of underpricing in a volatile market and state insurance regulations that drive up costs and restrict insurers from accurately pricing their product. And the experience of Massachusetts, the one state in which the key elements of ObamaCare already exist, tells us that reform is no protection against rising health care premium costs—and may, in fact, contribute to the problem.
Let's start with California's regulations. Here's the Wall Street Journal explaining how California's insurance regulations helped contribute to the expense:
Wellpoint's rate hikes are the direct result of the Golden State's insurance regulations—the kind that Democrats want to impose on all 50 states. Under federal Cobra rules, the unemployed are allowed to keep their job-related health benefits for 18 to 36 months. California then goes further and bars Anthem from dropping these customers even after they have exhausted Cobra. California also caps what Anthem can charge these post-Cobra customers.
Most other states direct these customers to high-risk pools that are partly subsidized, but California requires the individual market to absorb the customers and their costs. Even as California insurers have had to keep insuring these typically older and sicker patients, the recession has driven many younger, healthier policy holders to drop their insurance—leaving fewer customers to fund a more expensive insurance pool.
This explains why Anthem lost $58 million in California on its post-Cobra customers in 2009. If WellPoint didn't raise premiums amid these losses, it would soon be under assault from its shareholders, if not out of business.
The logic here, which you'd think the administration would understand, is actually really simple: Make it more expensive for insurers to do business, and insurance will become more expensive. Take Massachusetts, for example, where, in the wake of ObamaCare style reform, ongoing double digit rate hikes and faster than average medical cost-growrth have incurred the wrath of the governor's office, which is now threatening to review—and perhaps refuse—health insurance rate hikes in the state. (The one argument that insurance reform supporters have is that the state's individual market premiums have dropped. Problem is, that's likely a result of balancing out other regulations—and no matter what, Massachusetts' premiums are still the second most expensive in the nation.)
Meanwhile, as University of Pennsylvania economist Mark Pauly points out in an email to Cato health policy analyst Michael Cannon, individual market premiums "are very volatile so you can always find some insurer jumping their premium a lot…Consumers then usually move to the insurer that did not. I know the … California story: Wellpoint had tried aggressively to expand its individual business by setting low premiums, and I think realized the underpricing to gain market share did not make sense in a recession, so they put premiums back up where they should be."
What about the administration's report noting rising premiums across the country? It worriedly points to big jumps in health insurance premiums in states like Maine and Washington. Thing is, both of those states "reformed" their insurance markets by passing guaranteed issue and community rating—regulations that, by forcing insurers to take all comers and charge them equal rates regardless of risk level, send insurance markets into an adverse selection death spiral.
None of this is really surprising considering the Congressional Budget Office has already projected that individual premiums would rise as much as 13 percent under the stricter regulations imposed by ObamaCare; some people would see cheaper rates, yes, but only because of subsidies. In other words, contrary to what the administration and its supporters claim, under ObamaCare, insurance would probably get more expensive, and any decrease in rates for some would come at taxpayer expense.
