More Oversight Won't Mean Lower Premiums

Washington will spend $45 million to help states regulate health insurance rates. But don’t expect the move to stem the rise in premiums.

A recent headline in the Washington Post described how the federal government has just spent 45 million dollars so that 45 states can “improve the review of proposed health insurance premium increases, take action against insurers seeking unreasonable rate hikes, and ensure consumers receive value for their premium dollars”. Sounds great. Who can be against this sort of activity?

Pennsylvania is getting its million dollars but this is the current state capacity to review health insurers rate increases:

Current Legal Authority in Pennsylvania:

Individual Market: Individual: All rates subject to the prior approval of the Commissioner; disapproval for rates determined to be excessive, inadequate, or unfairly discriminatory. 60 percent minimum loss ratio for commercial carriers.

Small Group Market: Small Group Market: All Blue Cross (or Blue Shield) and HMO products require the prior approval for all rates.  No filing requirement for commercial carriers or commercial affiliates of Blue Cross Blue Shield plans.

So why doesn’t the Pennsylvania Insurance Commissioner simply block the 20-40% rate increases in the individual and the small group market that are being proposed for this year?  The main reason is that the small insurance companies that service the healthcare insurance market for individuals and small groups realize that two components of Obamacare, allowing children to remain on their parents’ insurance plans until the children reach 26 years of age and requiring insurance companies to accept all applicants despite their underlying health status will be very expensive. The insurance commissioner can count. He must find that accepting those high cost patients before the government run health insurance exchanges are set up in 2014 requires that the insurance companies can recoup those enormous costs or they will go under.

If you then counter this argument by saying that the insurance companies are conspiring to maintain the high rates, you then need to deal with some simple logic. If one insurance company could gain market share by undercutting the price of another and still make a good profit, why wouldn’t they do so? This is particularly true in Pennsylvania where there is market dominance by a few large insurers. In fact, the large Blue Cross insurance companies have pushed for doing away with so-called medical underwriting in favor of community rating. That would kill off their small competitors.  Moreover, the 80% rule that demands that insurance companies spend at least 80% of their premium revenues on direct provision of care will also crowd out the small insurers in favor of the insurance giants.

Where does this leave us? We have now just spent 46 million dollars to upgrade state review of insurance company rates. It turns out that 31 states already have that legal power. So one could argue that we just wasted another 31 million dollars. Moreover, since the health insurance business is a low margin business and since one has to believe that there is some semblance of a market mentality by which individual companies would like to improve their market share compared to their competitors, one could also conclude that some substantial part of the proposed increase in rates is the result of “need” rather than “want”. A failed insurance company because of a deficit of reserves is a real mess (see AIG).

The problem we are facing is not an insurance problem -- it is a healthcare-cost problem. Obamacare is an insurance plan. The 46 million dollars, although chump change in the current world of healthcare spending, will not do much. A good bet on one of those illegal offshore internet betting sites is that healthcare premiums will continue to rise by double digits into and through 2014. After that, it will be a tax increase as our Single Payer Plan is enacted.