Obamacare’s Lethal Flaw
The 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.