Other Reasons Why ObamaCare Probably Won't Reduce Health Insurance Premiums

A joint Washington Post/Kaiser Health News report today suggests that last year's health care overhaul may not be able to restrain the growth of health insurance premiums because "the law doesn't give the federal government or the states, the traditional regulators of health care, the nuclear option: the power to reject rate increases outright." It's likely that the law won't result in lower premiums, but given the mess that Massachusetts made of its health insurance market exercising just that power, I'm pretty sure that's not the reason why. Instead, it's likely that the law's expansion of various health insurance subsidies will continue to divert economic resources into health care spending that otherwise might have been employed elsewhere. 

Not am I convinced by the report's claim that law might help "tame premiums" by requiring insurers "to spend at least 80 percent of premium revenue on medical services and quality improvements—or issue rebates to consumers." If anything, that provision, which regulates medical loss ratios, might drive premiums up faster. Because insurers will be required to spend a minimum of 80 or 85 percent of revenue on federally defined clinical services, leaving just 15 or 20 percent for administrative expenses, marketing, and profits, the only way they'll be able to expand their profits is by increasing total premium revenue, and by spending larger amounts on so-called clinical services. Ultimately, the provision gives insurers an incentive to spend more and more on health procedures, even if they aren't necessary, because profits can only grow in relation to the dollar-total of medical procedures they approve.