New York State's Highly Regulated, Highly Priced Health Insurance

The New York Daily News reports that one health insurance company is now charging $3,319 each month for an individual premium. Another insurer is charging $8,463 each month for a family plan. Meanwhile, of the 13 HMOs serving New York City in 2004, just seven remain, and the number of people purchasing their own insurance has dropped from roughly 100,000 ten years ago to 13,335. The state's health insurance market, according to insurers and state officials, has fallen into an "adverse selection death spiral": rising premiums push out younger and healthier customers at the margins, which leads to a smaller, more expensive insurance pool, which pushes out even more of the young and healthy customers and so on and so forth.

Why is health insurance in New York State so expensive? And why is the market collapsing?

Part of the answer is that New York is an expensive state in which to operate, and the population is expensive to insure. But it's also because New York is one of the most highly regulated health insurance markets in the United States.

High insurance prices and a shrinking market aren't in New York aren't a new development. Almost two decades ago, the state began to enforce a pair of regulations that were intended to fix inequities in the health insurance market. The first, called guaranteed issue, required insurers to sell policies to all comers. The second, called community rating, prohibited insurers from charging different premiums based on health status, age, or sex—the same package of benefits, in other words, had to be sold at the same price regardless of individual risk factors. 

The intention was to make health insurance more affordable and accessible to those without employer-sponsored insurance. It didn't work. Instead, according to a 2009 report published by the Manhattan Institute, the market effectively collapsed. Health insurance premiums began to rise as insurers were prohibited from pricing risk. As prices rose, so did the velocity of the "death spiral." The individual insurance market shrunk from 4.7 percent of the state's insurance market to just 0.2 percent of it, while in the rest of the U.S. the individual market rose from 4.5 percent to 5.5 percent. 

The twin insurance markets were responsible for a substantial portion of the rise in prices: The Manhattan Institute report estimated the dropping community rating and guaranteed issue would reduce premiums prices by an average of 42 percent.

Other states that tried the same regulatory one-two punch fared similarly: A 2008 analysis in Health Affairs by a Kaiser Permanente official noted that the individual insurance markets in Kentucky, Maine, Massachusetts, New Hampshire, New Jersey and Vermont all "deteriorated" after implementing the two insurance regulations. But according to a insurance industry data, these states saw "no significant decrease in the uninsured population."

In a state like New York, where these sorts of de facto price controls have already decimated the individual insurance market and driven the remaining premiums sky high, ObamaCare's individual mandate may have some effect on premium prices. Because the mandate will bring younger and healthier individuals into the insurance pool, the individual rates may see a one-time drop, perhaps even a large one. This is what happened in Massachusetts, which saw a one-time drop in its highest-in-the-nation individual insurance rates after implementing a mandate. But insurance prices in the state are rising faster than the state can afford, and individual insurance premiums are still the second highest in the nation—behind New York's.

Meanwhile, the only way to expand the insurance pool was to first mandate participation and second subsidize premiums for nearly all the new entrants: About 80 percent of those enrolled in Massachusetts's insurance exchanges receive subsidies. So it's members of the public who get stuck with the tab to expand these insurance pools. Premium prices have only come down because taxpayers have paid up.