RSS Feed MenuThe healthcare legislation almost certain to pass the Senate Christmas Eve offers plenty for any free marketer to dislike. But one feature that’s gotten little attention — the introduction of centralized price control for health insurance policies — may rank as the new bill’s very worst feature.
Some background: for all of the command and control state and federal governments have exercised over healthcare policy, no state directly dictates prices to insurers. Even when they require certain benefits, mandate that insurers charge everyone the same price for the same plan, and even design new types of private-market healthcare plans, the U.S. government has never tried to dictate the final market price of health insurance. After all, if a health insurer can’t at least break even on selling a policy, it’s not going to stay in business and, if it charges too much, it’s not going to sell any policies.
The new healthcare legislation, however, will introduce “exchanges” (places for individuals to buy health insurance) that will require insurers to present lots of paperwork for every price increase that impacts individuals who buy policies on their own. (There will also be some regulation for plans outside of the exchanges although, most probably, much less.) Since just about everyone buying policies on the exchanges will directly feel any prices increases, immense political pressure will exist to keep them down through this control system.
This practice (called “prior approval rate regulation”) remains reasonably common for homeowners and automobile insurance but never made much of a dent in health insurance probably because so few people pay for it out of pocket. It has never worked: Researchers at the University of Pennsylvania, Cornell, and dozens of actuarial firms all found that such regulation does nothing to keep prices down, adds to overhead, and discourages innovation. In fact, cutting back on this type of insurance regulation makes so much sense that even dyed-in-wool liberals have embraced it. Democratic Massachusetts Governor Deval Patrick recently oversaw efforts to dismantle an overbearing auto insurance regulatory system that Republicans had established in his state while Howard Dean’s tenure as Vermont governor saw him turn his state into a free-market Mecca for property and casualty insurance.
For health insurance, indeed, the practice may have some enormous dangers. In the short term, it may keep the price of “exchange” policies below the break-even level since insurers will still be able to make sizeable profits selling health insurance to employers who will have to deal with less rate regulation. (Very large employers, in any case, often have more bargaining power than health insurers.) If exchange policies emerge as cheaper than employer-based policies, however, it will make it pretty easy for employers to drop medical coverage altogether, raise employee salaries and encourage their employees to find coverage through the exchanges. While a larger individual market makes a lot of sense, price controls would undo any good that may result from individual shopping if it results in more political pressure to disapprove any rate increases. If medical costs continue to rise — and they’re rising everywhere — somebody will still have to pay the real world price increases. If insurers are forced to pay all of the costs themselves, they will simply become insolvent and go out of business. Since this probably won’t be allowed to happen (large health insurers have always gotten bailouts when they’ve gotten into trouble), it’s much more likely that other parts of the medical system will have to pay these costs. A few things seem likely as a result of these price controls: wages will fall in real terms for medical personal (almost certain), taxes will go up (again, almost certain), medical innovation will slow (likely), and the American medical system’s already implicit care rationing practices and waiting-list practices will increase (quite possible).
Unlike many other troublesome aspects of the new healthcare bill (a massive expansion of Medicaid, for example), furthermore, the direct price controls offer an entirely new type of government control rather than a simple expansion of an existing control mechanism. For the moment, the price controls have the greatest direct, short term impact on the small fraction of Americans who buy health insurance in the individual market. The gradual expansion of price controls, however, could well have devastating consequences for the American healthcare system as a whole.
greg_barton // Dec 21, 2009 at 1:21 am
60 votes! Woo hoo!
aarongantt21 // Dec 21, 2009 at 1:29 am
Somebody mentioned Currently, a 60-year-old likely would pay five or six times more for private medical insurance than someone in his twenties but it may not be true always check http://bit.ly/7bwEx2 for lower price coverages
sinz54 // Dec 21, 2009 at 9:23 am
Even the conservative Heritage Foundation has endorsed the concept of a health insurance exchange–but without these price controls.
If the price controls prove too restrictive, they can be lifted in future years.
teabag // Dec 21, 2009 at 9:53 am
I see that the latest GOP tactic is praying to the Baby Jeebus that a Dem Senator dies and that screws up the whole health care vote.
Nice going Sen Coburn, your constituents must be really proud of you.
Rumble in the Jungle » Blogs For Victory // Dec 21, 2009 at 11:05 am
[...] UPDATE: More from the Globe and Frum Forum. [...]
sdspringy // Dec 21, 2009 at 12:57 pm
Senate Majority Leader, Harry Reid, calls the Senate for a vote at 1 am with the time honored call for all hogs, Sooiee , Sooiee. And watch the Political Pigs come a running, shouldering their way to the public trough.
And what did the Political Pigs receive in the trough? 300 million for Pig Landreau, The Big Pig from Nebraska, used to corn, receives a federal gift FOREVER. Lets not forget the east coast Piggies. New hospitals for this little Piggy Dodd, and even the Socialist Pig from Vermont receive more free, tax payer funded clinics.
And as all Political Pigs know with an election a stake, a tax on Botox is a bad thing, so scrape the 5% tax on cosmetic surgery.
Yes, lets all hale the HOPE and CHANGE in government. Did you see the insurance company stocks going up? No reason to suspect a insider deal. No import of prescription drugs, big pharma has cut the deal.
Its pathetic beyond description. A Democracy where the vote has a price, the excuse for Liberals to soothe their conscience. Soooie, Soooie
TheRadicalModerate // Dec 21, 2009 at 1:29 pm
“In the short term, it may keep the price of “exchange” policies below the break-even level since insurers will still be able to make sizeable profits selling health insurance to employers who will have to deal with less rate regulation.”
This makes no sense–it’s equivalent to “we lose a little on each sale, but we make it up in volume.” If insurers can’t break even offering a qualified plan on the Exchanges, then they simply won’t offer qualified plans on the exchanges. That’s a self-correcting problem: the exchange idea will fail. It doesn’t mean that they won’t keep offering non-exchange group and individual plans.
balconesfault // Dec 21, 2009 at 1:42 pm
sdspringy: And what did the Political Pigs receive in the trough? 300 million for Pig Landreau, The Big Pig from Nebraska, used to corn, receives a federal gift FOREVER. Lets not forget the east coast Piggies. New hospitals for this little Piggy Dodd, and even the Socialist Pig from Vermont receive more free, tax payer funded clinics.
Interestingly, Republicans had the power in their hands to strip the leverage that Nelson, Naldreau, and the others used to bring the pork home.
They could have simply signaled to Reid that they would allow the bill without a public option to proceed to the floor for a vote, if the pork was stripped out.
Ironically, it was the Republicans unanimity in trying to block the vote that gave Nelson an excessive amount of power, and made the bill less fiscally responsible.
sdspringy // Dec 21, 2009 at 3:02 pm
Oh that is so good Balcone, blame the Rep for the Dems being bad. Sweet. Mommy the Devil made me do it. I was a pig or prostitute because the Republicans made me do it.
At some point you have to take responsibility for your own actions. Like Rosy O’Donnell blaming the fork and spoon for her weight problem.
Pathetic
mlindroo // Dec 21, 2009 at 3:36 pm
By the way, what’s the likelihood of the House and Senate Democrats failing to reconcile their differences next month…?
Among other things, the final Senate version of the health care reform bill lacks the public option and Stupak anti-abortion amendment, which angers different factions of Pelosi’s razor-thin majority. Yet Sen. Nelson has warned that he will accept very few changes.
MARCU$
jfxgillis // Dec 21, 2009 at 3:37 pm
Horrors!
such regulation …. discourages innovation
You mean the insurance companies won’t be able to do what the banking companies did to us?
How about this for an insurance innovation: People pay premiums. Companies pay claims.
balconesfault // Dec 21, 2009 at 3:45 pm
Just noting the irony, my dear friend.
At a certain point in the deliberations, Republicans had to realize that a bill that they didn’t like was going to be passed. On the other hand, the provisions that Republicans objected to the most, for a public option or Medicare expansion, were stripped.
They could have decided to maintain ideological purity, and vote as a block to maintain a filibuster … or they could have acted pragmatically, allowing a few centrist Republicans from states where they wouldn’t be punished (eg, Snowe and Collins, Voinovich, Gregg) to make a deal that rendered Nelson’s and Landrieu’s vote irrelevant in exchange for stripping offensive earmarks.
By the way – did you ever look at the processes at the last moment during the Medicare Bill passage under Bush and the Republicans? It was a porkanalia that far outstripped anything we saw this weekend. In this bill, at least all the pork provisions are largely related to healthcare … in that case it was a huge laundry list of handouts, many of which had absolutely no relationship to the medicare program or drug reimbursements.
For what it’s worth, most Democratic analysists today are definitely finding fault with Landrieu and Nelson, who were claiming some high ground as fiscal conservatives then were willing to throw that principle overboard for non-fiscally conservative pork.
Bernie Sanders, for what it is worth, is doing exactly what his constituents elected him to do – to try to pass the broadest possible healthcare bill, and failing that, to improve access to healthcare for his own state.
balconesfault // Dec 21, 2009 at 3:56 pm
You mean the insurance companies won’t be able to do what the banking companies did to us?
LOL – at some point, we as a society should learn that use of the term “innovative financial instrument” should be met in the same way we’d react to an invite to participate in a game of 3-card monte on a New York street.
Oneon1isto // Dec 22, 2009 at 5:52 pm
Actually, it is kind of funny that it took a liberal, independent Lieberman to do what the Republicans have been blustering on for months. Gosh, look what happens when you enter into the process and don’t catcall from the sidelines? It’s crazy!