Will ObamaCare's Consumer Protections Actually Protect Consumers?

The Obama administration claims that its new authority to "publicize excessive, unreasonable [health insurance] rates will be a major protection for consumers under President Obama's health care law," according to an article in yesterday's New York Times. Much of the rate review called for by last year's health care overhaul will take place at the state level. But the federal government is expected to take over the process in 10 states where, according the NYT, the administration believes that "state officials do not adequately regulate premiums for insurance sold to individuals or small businesses."

So, how exactly are consumers protected by the federal government's oversight of state insurance markets? For one possibility, we can look to Massachusetts, which last year provided a handy illustration of what tough government oversight of health insurance rates looks like.

At the beginning of 2010, the Bay State's insurance premiums had been rising for years, and the overhaul did nothing to quell the increase—and may have made the prices even higher. In August of 2009, The Commonwealth Fund, a health focused non-profit research group, reported that with an average family price of just over $13,000, the state's insurance premiums prices were the highest in the nation, and had risen 40 percent since 2003, compared to 33 percent nationwide.

And so, in February, 2010, Massachusetts' Democratic Governor, Deval Patrick, used an emergency rulemaking power to give his office what The Boston Globe described as "sweeping authority" to regulate health insurance rate increases within the state.

Insurers warned that the rules would lead to ugly court battles. But two months later, the governor's office rejected 235 of the 274 proposed rate increases for the year. The result was not just legal action, but a severe temporary disruption in the state's health insurance market. In April, 2010, just days after the rejections were announced, nearly all of the state's insurers refused to offer new insurance policies to individuals or small businesses. The reasoning? Without the proposed rate increases, insurers argued, they would be forced to operate at a loss. For a little over a week, the state existed in what The Boston Globe called a state of "market chaos."

A judge quickly ordered insurers to reopen for business, but there were still aftershocks to Patrick's aggressive regulatory push. For the first time ever, insurers in the state began to sell policies that prohibited consumers from receiving services at some of the state's most widely recognized, popular—and, naturally, expensive—hospitals. So the effect of the state-imposed price controls was not to increase efficiency so much as to reduce access to some of the state's best providers. Second, the insurer worries about operating expenses turned out to be correct: The state's four largest health insurers reported combined losses of more than $150 million for that quarter—with three of the insurers explicitly blaming their losses on the rate rejections.

Now, it's true that under ObamaCare, the federal government does not have the authority to deny rate hikes outright. But it might as well. Rather than flatly reject rate hikes, the administration reserves the right to ban insurers that demonstrate a "pattern" or "practice" of excessive rate hikes from the law's new health insurance exchanges, cutting these insurers off from a major potential source of business.

Health insurance rate regulations in Massachusetts made a mess of the market. But it's not clear how well they protected the state's consumers. When it comes to the federal rules, it's probably safe to expect the same.