Health Insurers Raise Some Rates by Double Digits

Its happening folks. The consequences of Obamacare that I wrote about in August. In California, Aetna is proposing rate increases of as much as 22 percent, Anthem Blue Cross 26 percent and Blue Shield of California 20 percent. Government intervention in the private market has failed to deliver the promised benefits and caused unintended consequences, but Congress never blames itself for the problems created by bad laws. Instead, we are told more government — in the form of “universal coverage” — is the answer. But government already is involved in roughly two-thirds of all health care spending, through Medicare, Medicaid, and other programs.

ObamaCare’s new coverage mandates have contributed to some of the increase in the individual market: about 5 percent as a result of the law.

That explains some of the increase. But not all of it. Which is why those looking for another culprit should consider the possibility that a provision intended to help consumers get better value for their money, is actually costing them higher premiums.

That provision, often referred to as the 80/20 rule, sets mandatory medical loss ratios (MLRs) for health insurers. The MLR is an accounting requirement which says that insurers have to spend at least 80 percent of their total premium revenue on medical expenses, leaving just 20 percent for administrative costs, marketing, and other non-medical expenditures. Any insurer that fails to meet this target must issue rebates to customers. This year, insurers rebated about $1 billion.

The MLR provision creates two incentives for insurers to jack up health insurance premiums. One is the plain fact that with profit and administrative costs capped as a percentage of premium revenue, the easiest way to generate larger profits is to charge higher premiums.

The other is that the rebate requirement means insurers may need to charge higher up-front premiums in order to protect themselves from the risk of a bad year. As Scott Harrington, a professor in the University of Pennsylvania’s Department of Health Management, explained in a November 2012 paper, that’s because health insurance claims — and thus MLRs — fluctuate significantly between years. Harrington’s paper, which got funding from a health insurance trade group, argues that the annual variation, and the resulting uncertainty, creates a problem for insurers: If claims are low in a given year, they end up rebating the difference to the customer because of the MLR rule. If claims are unexpectedly high, however, they end up eating the difference. Insurers thus have a incentive to protect themselves by charging high premiums at the outset, and then paying those premiums back in rebates should claims come in at low or expected levels.

Is the MLR rule causing the higher premium requests? It’s hard to say with certainty, but it fits the bill in many ways: Harrington’s analysis suggests that the high up front premiums should be concentrated in the small-group and individual markets, which is exactly what a recent New York Times article reports. No matter what, it’s clear that ObamaCare isn’t resulting in lower premiums. And for many people, in the years after the law, premiums aren’t just going to up up a little. They’re going to rise a lot.

So much for Obamacare making health coverage more affordable. Typical of all regulations that attempt to determine a price that can only be determined by the voluntary exchange between patients and providers. It is theoretically and practically impossible for a bureaucrat — no matter how accurate the cost data, how well-intentioned and how sophisticated his computer program — to come up with the correct and just price. The (doctor-patient) relationship has been corrupted by the intrusion of government and its intermediaries (HMOs) to such an extent that we can no longer speak of a relationship that can produce meaningful pricing information.

No other industry provides a more dramatic illustration of the failure of government intervention than medical care. Our very real medical crisis has been the product of massive government intervention, state and federal, throughout the century; in particular, an artificial boosting of demand coupled with an artificial restriction of supply.
Only in our system of medical insurance does the government pay, not a fixed sum, but whatever the doctor or hospital chooses to charge. In economic terms, this means that the demand curve for physicians and hospitals can rise without limit. The suppliers can literally create their own demand through unlimited third-party payments to pick up the tab. If demand curves rise virtually without limit, so too do the prices of the service. In order to curtail the flow of these subsidies, the government and other third-party insurers have felt obliged to restrict somewhat the flow of goodies: by increasing deductibles, or by putting caps on Medicare payments. All this has been met by howls of anguish from medical customers who have come to think of unlimited third-party payments as some sort of divine right. The result has been accelerating high prices and deterioration of patient care.

Not only is the mandate unconstitutional; it is a violation of the basic freedom to make our own decisions regarding how best to meet the health care needs of ourselves and our families. Politicizing health insurance inevitably makes it more expensive. As the cost of government-mandated health insurance rises, Congress will likely respond by increasing subsidies for more and more Americans, adding astronomically to our debt burden. The federal government is already set to spend more than $1 trillion over the next decade to subsidize coverage and expand eligibility for Medicaid. An insurance mandate undermines the entire principle of what insurance is supposed to measure – risk.

Increasing healthcare coverage for more Americans is a laudable goal, but expanding coverage by chipping away at the freedoms afforded to individuals and small-business owners in the U.S. Constitution is unacceptable. The law contains a complex employer mandate requiring some firms to provide insurance, pay expensive penalties or both. This structure ultimately creates perverse incentives for hiring and growing. The individual and employer mandates in this law are bad for small employers, bad for low-income workers, and bad for the economy.


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