Did You Hear About Anthem Blue Cross Cutting Premiums 20 Percent?

Probably not. But it’s just as accurate as recent headlines trumpeting a 39 percent increase for individual policyholders. The insurer’s letter to Kathleen Sebelius, Secretary of Health and Human Services, describes a wide range of premium changes, from a reduction of 20 percent to an increase of 35 percent, after adjusting for an aging pool of individually beneficiaries. Overall, Anthem Blue Cross announced an average rate hike of 25 percent. That is hardly satisfactory, but not isolated.

WellPoint expects costs for hospitalization and physicians to increase by 10 percent in 2010, and pharmacy costs to go up 13 percent. The insurer also underestimated medical costs last year by 6 percent, contributing to a loss of $10 million in 2009. About 2 percent of the increase is explained by “deductible-leveraging.” Deductibles do not go up every year, like medical costs. Therefore, the effective deductible shrinks somewhat, and an increasing share of medical costs must be loaded onto premiums. That still leaves about 7 percent of the average premium hike unexplained. It also doesn’t explain why some beneficiaries will enjoy a drop in premiums of one-fifth, while others will suffer an increase of more than one-third.

The problem, often the case in health care, is government. Federal and California laws and regulations fragment health coverage, which makes it impossible for insurers to pool risk effectively. The “original sin” is the tax treatment that makes non-taxable health benefits the property of employers, rather than employees. Because of this discrimination, most people are in the individual market for only a short time, three years according to Anthem Blue Cross.

When people fall through the cracks because of a change in employment, they risk losing their ability to buy affordable health insurance because of a so-called “pre-existing condition.” Imagine if the government discriminated against individual ownership of life insurance in a similar way. Every time a person changed jobs, or became self-employed, he would lose his life insurance and have to buy a new policy. It would be impossible to manage the risk under such circumstances.

Federal and state governments could solve the problem by eliminating discrimination against individually owned health insurance. Instead they have tried to patch up employer-based health care. This has further fragmented coverage and led to instability in premiums. In 2009, recession and government action made things worse, likely contributing to the Blue Cross premium increases.

In 1992, California further fragmented health coverage by outlawing actuarially accurate premiums in the small-group market. AB 1672 requires carriers to bundle small businesses into no more than nine regions and charge a standard rate for each region, which they can modify up or down by 10 percent based on claims experience. They can also modify premiums for the ages of people in the group, but nothing else—not even smoking. As a consequence, a self-employed person can remain uninsured if he loses his job, wait and see if he gets sick, and then establish a two-person business with his spouse or sibling to take advantage of this “guaranteed issue.” In the current environment, such a course would be perfectly rational for an increasing number of people.

The stimulus bill throws an extra federal $11 billion at Medi-Cal, California’s Medicaid program for low-income people. This simply increases the cost-shift that states impose on the privately insured. According to a 2008 study, Medicaid programs pay doctors only 56 percent of what private payers do, and hospitals only 67 percent, nationwide. This causes a cost-shift of about 15 percent, the increase in private payers’ premiums to subsidize failing government programs. The bigger Medicaid grows, the bigger the cost-shift

From 2007 to 2009, federal and state spending on Medi-Cal jumped 11 percent, from $36 billion to $40 billion. From June 2008 to June 2009 alone, the number of people enrolled in Medi-Cal increased by 5 percent. Such increases in government dependency surely increase the “hidden tax” government levies on private insurers.

Government discrimination against individual ownership of health insurance has many negative consequences. The political class seizes on outrageous premium increases to attack insurers’ “greed.” The political class never looks in the mirror to identify the true cause of California’s broken market for health insurance.