ObamaCare: A Victory For Regulatory Whimsy

The health insurance rate-review regulation included in last year's health care overhaul goes into effect this week. Accounts in The Wall Street Journal and The Washington Post suggest that it's a weak regulation, because regulators can't actually reject rate hikes. Here's The Post:

There is, however, one thing regulators cannot do: reject the "unreasonable" rate increases. They can make all the public fanfare they want around big rate increases but, at the end of the day, they cannot stop premium increases from going through.

And The Journal:

There's a big catch. Even if regulators find the rate increase is unjustified, the law gives them no new powers to block the insurer from charging it. Instead, federal regulators say they are hoping that disclosure of large increases—which will be posted on the Department of Health and Human Services' website—will be enough to discourage carriers.

It's true that regulators can't simply deny rate hikes they deem unreasonable. But as the Congressional Research Service explained in a report last year, they do have another avenue of attack: pushing insurers out of the new health insurance exchanges—the state-based, government-run health insurance marketplaces created by ObamaCare.

According to CRS, states will "make recommendations to the exchange in their state about whether a health insurance issuer should be excluded from participation in the exchange based on a pattern or practice of excessive or unjustified premium increases." Given the expected dominance of the new insurance exchanges in the individual insurance marketplace, this is a pretty serious threat, and it potentially gives regulators significant leverage against insurers.

So how will it be determined if insurers are engaged in a "pattern or practice" of "excessive or unjustified" increases? However the authorities want. As CRS notes, "the terms 'pattern' and 'practice' are not defined by law."

If those recommendations are anything like previous state-based efforts to regulate health insurance, they'll probably be inconsistent and inscrutable. The CRS report points to Regence Blue Cross Blue Shield, an insurer in the state of Oregon that asked for a 26 percent rate hike for 2010. State regulators denied the 26 percent hike. Were prices falling, and profit margins on the upswing? Was the company selfishly raking big bucks for itself while saddling consumers with giant rate hikes? Not at all. Quite the opposite, in fact. Medical spending has risen 12 percent the previous year, and the company had taken a 9.7 percent loss of more than $15 million. 

Now, state officials didn't say that Regence couldn't raise rates at all. They approved a 17 percent hike, arguing that the smaller hike would be enough because they had approved a full 26 percent hike the previous year. So what, I suppose, if the company had still taken an eight figure loss? And if the losses persist, and Regence goes out of business, or stops offering many of its plans? The beginning of the CRS report notes that "premiums must be adequate to pay for expected health care use, they also must be sufficient to compensate insurance carriers for taking on the financial risk associated with providing coverage." Forcing insurers to operate at a loss, subject to regulators' whims, does not seem particularly sufficient for either.