The Health Insurance Trade-Off Game

Last month, I noted that, in Massachusetts, price controls designed to reduce health insurance premium prices had pushed health insurers to offer plans that, according to the Boston Globe, "largely bar consumers from receiving medical care at popular but expensive hospitals." The paper called this a "radical" and "once unthinkable" idea that, thanks to the state's aggressive crackdown on insurance premium hikes, was becoming a trend—despite the fact that "Massachusetts consumers and employers have long cherished choosing from a broad range of providers." Unthinkable or not, though, it's an outcome that should have been entirely predictable to any student of the most basic elements of supply and demand: Price controls result in service cuts.

Now, we're seeing the flip side of that equation: New insurance mandates mean higher premium prices. Starting later this year, the Affordable Care Act will require insurers to cover children until they are 26 years old. That will push plan prices up by an average of just under 1 percent, according to the AP. It's a relatively small hike, but as the article notes:

That premium increase will come on top of hikes employers already expect for next year. Large companies forecast that premiums will rise between 6.5 percent and 7 percent without the impact of the health care overhaul, according to an early survey by the National Business Group on Health and benefits consultant Towers Watson.

Not surprisingly, the new rules come with a host of business-side complications. From The Wall Street Journal:

Insurance coverage for a person in his or her mid 20s is likely to cost the health-insurance provider more than coverage for a younger dependent. But the rule specifies that companies can't limit the benefits package for a young adult so that it's narrower than what's offered to other dependents.

The rules could pose a challenge to insurance companies, which had pushed for wider latitude to vary premiums based on age. Insurance providers could end up passing on the cost by raising premiums for all younger enrollees.

Prices determine quality of service, mandates drive prices up, and regulations make implementation more difficult; none of this is terribly shocking or controversial. Yet supporters of the Affordable Care Act have largely dismissed these concerns as trivialities.

Take, for example, the New York Times' unsigned editorial on health insurance rate hikes yesterday. It goes after insurance giant Anthem for big proposed hikes in California, and makes a reasonable point about some errors in the company's accounting. But factoring in those accounting errors does not remove the need for large rate hikes to cover the company's insurance losses in the individual market. And the Times admits that the "reason the company lost money on the individual market is that it lost heavily on policies issued to participants in two state programs that required Anthem to cover people with pre-existing conditions and capped the premiums it could charge." Rather than hike individual-market premiums, the Times says, "Anthem could have spread its losses more broadly to protect its individual buyers."

Well, it could have. But, as the Times also notes, pushing the cost of those losses onto its employer plans would likely have affected its competitive position. That could have meant less business, which would have meant a smaller insurance pool, which, in turn, would probably have made premiums even more expensive.

No matter what, though, the point is that the state's regulations made the cost of business more costly and thus drove prices up.

Naturally, no one wants to pay for these increases. But someone has to.

Those in government who want to regulate insurers and impose mandates on their products seem largely uninterested in dealing with these trade-offs, preferring instead to layer endless rules and regulations on top of each other in hopes that eventually a working system will emerge. That's not likely to happen. They might not worry much about the trade-offs and costs of their policies, but it increasingly appears that the rest of us will have to.