Faced with spiraling statewide health costs, Massachusetts passed a law in 2008 mandating the state’s attorney general to issue annual reports with recommendations on how to keep a lid on spending. On June 22, Martha Coakley released her latest report, which recommended that the state impose price controls on medical providers.

Coakley blames “market dysfunction” for the problem. Unfortunately, the attorney general fails to identify the 2006 reform signed by Gov. Mitt Romney as a significant contributor to this dysfunction.

The 2006 reform mandated that residents buy health insurance — a sure way to increase health spending. But it also gave the insurance commissioner political power to dictate insurance premiums. The commissioner refused 85 percent of requested rate hikes for April 2010 and demanded that plans rebate premiums that had already been paid.

The only result is that Massachusetts’ health plans are hemorrhaging cash, and a senior regulator has described the mess as a “train wreck.”

In a new study, “Bust or Bailout? The Future of Medical Plans Under Obamacare,” I model health plans’ future solvency under these conditions. My analysis concludes that the state’s largest health plan, Blue Cross Blue Shield of Massachusetts (not involved in the research) is likely to be insolvent by about 2016 — even if the state releases its death grip.

Under ObamaCare, this problem will soon go national. ObamaCare distributes federal grants to states that encourage their insurance departments to increase their power of prior approval of premium increases. States are responding by considering new laws to expand those powers.

As Massachusetts’ experience shows, politicized rate reviews give perverse incentives to politicians to blame private health plans, rather than government interference, for increasing health costs. Although they add more value than most people believe, health plans are largely pass-throughs. Unlike Ms. Coakley’s recommendation, ObamaCare does not give politicians control of fees that providers charge to private health plans — nor should it.

Nevertheless, giving politicians control of insurance premiums merely squeezes insurers’ margins. Nor is there evidence that prior approval of premium increases has protected consumers from unreasonable rate hikes. My study examines data on premiums and premium-review laws for small-group premiums in 43 states in 2006 and 2008. Nineteen states were “file and use,” which means that health plans must submit premium increases to the insurance commissioner, but he has no power to reject them.

Twenty states required prior approvals of rate changes by the insurance department, and four were unregulated.

There does not appear to be any connection between prior approval and a lower change in rates from 2006 to 2008, nor the absolute value of rates in 2008.

The average increase over the period was 8 percent for both “file and use” states and states requiring prior approval. The highest increase in the “file and use” states was 27 percent (in Virginia) and the highest in the states which required prior approval was 25 percent (in neighboring Maryland). Of the 45 states for which premiums were available for 2008, the average rate in 2008 was very slightly lower in “file and use” states ($345 per month) versus states with prior approval ($351).

Data for the much smaller individual market is available for 29 states in 2007 and 2009. Of the 22 states that legislated prior approval of rate increases, four allowed “file and use,” and three were unregulated. The highest increase in the four “file and use” states was 13 percent in Texas, versus 29 percent in New York, the state requiring prior approval that experienced the highest increase.

Contrary to Ms. Coakley, the problem lies not with market dysfunction but with the ruling class notion that politicians can control health costs. Those costs will only decline when patients, not politicians, directly control more of our health spending. This cannot happen until President Obama’s health law is repealed. In the meantime, both Massachusetts and the nation should reject politicized control of insurance premiums.

Source: http://www.telegram.com/article/20110804/NEWS/108049433