Over Regulation Reduces Choice in Health Insurance: An Update Health Policy Prescription

Key Points:

  • Obamacare, signed in March 2010, has not reduced the rate of growth of health-insurance premiums, which increased by 20 percent in the small group market between 2008 and 2010.
  • Obamacare subsidizes states to increase political control of health-insurance premiums, although there continues to be no evidence that such interference reduces the rate of growth of premiums.
  • When monitoring competition, government regulators use a measurement of market concentration that does poorly when applied to choice in health insurance.
  • New evidence continues to support the conclusion that Obamacare will lead to less choice of health insurance.

Obamacare Further Politicizes Health Insurance

Earlier this year, the Pacific Research Institute published a study demonstrating one way that Obamacare will dramatically reduce Americans’ choice of health insurance. By encouraging states to pass laws giving politicians control of health plans’ premiums, Obamacare creates incentives for politicians to impose populist limits that threaten health plans’ solvency. Furthermore, common measurements and tools used to determine whether health insurance is “competitive” are deeply flawed, leading even well-intentioned regulators astray as they seek to control the cost of health insurance.1 This article incorporates new data to test whether the conclusions of the earlier study persist. It finds that they do.

Through federal subsidy, Obamacare encourages states to grant their Insurance Commissioners the power to deny increases in premiums, also known as “prior approval” of rate changes. While politically popular, this does nothing to reduce underlying health costs, which are driven by providers and patients in an environment overly dependent on third-party payment. To put this in perspective, more than half of states already require prior approval of rate increases. Forty-three states have some process for reviewing rates in individual and small-group policies, but many are so called “file and use” states, which means that the health plans must submit their rates to the Insurance Commissioner, but he or she cannot turn them down. Three states don’t require any filing information at all.2

The Obamacare legislation authorized the Secretary to give $250 million in grants to states to support their own rate review efforts. Fifteen states have reported that they will use this money to lobby for more statutory power from their legislatures. Twenty-one will use the money to expand their activities. All will require insurers to report more information about how they set premiums to their Insurance Departments. Most states also promised to invest in technology to make their operations more transparent to the public.3 Money and support from the federal government has injected momentum into these initiatives in many states.

Cost of Health Insurance Went Up After Obamacare Was Signed

Many Americans complain that there is too little competition between health plans. To some degree, this is true. However, we must not succumb to the natural temptation to call for more government intervention to reverse this problem. On the contrary, concentration among health plans has largely occurred subsequent to government action.

Signed in March 2010, Obamacare has certainly had the opposite effect than that promoted by its advocates. Table 1 shows premiums in the small-group market in 2008 and 2010, for 37 states with available data.

In only one state, Utah, did premiums for single coverage in the small-group market drop – by 17 percent. However, the median increase in premiums was 20 percent – one fifth. And the biggest increase, 68 percent, took place in Washington State – a state which already imposes the “prior approval” of rate increases encouraged by Obamacare!

Premiums in States with Prior Approval of Rates Are Not Lower Than in States without Regulation

There is no evidence that prior approval of premium increases has protected consumers from rate hikes. Examining data on premiums and premium-review laws for small-group premiums in 37 states in 2008 and 2010, 16 states allowed health plans simply to file their new rates and then use them, 18 required prior approvals of rate changes by the Insurance Department, and three were unregulated. As shown in Table 1, there does not appear to be any connection between prior approval and a lower increase in rates from 2008 to 2010.

The median increase over the period was 22 percent for the file-and-use states and a slightly lower 17 percent for states requiring prior approval. The highest increase in the file-and-use states was 50 percent (in Tennessee) but the highest in the states which required prior approval was 68 percent (in Washington). Utah, the only state which experienced a reduction in rates, is a file-and use-state. Furthermore the three completely unregulated states had the lowest median rate increase, 14 percent, and none of the three was a wild outlier like Tennessee or Washington.

Market Concentration Is Not An Indicator of High Health-Insurance Premiums

The previously published study also showed that state markets for health insurance became more concentrated during the years from 2003 through 2008, according to the Herfindahl-Hirschman Index (HHI). The HHI measures market concentration as follows: If there are four competitors in a market, each with 25 percent share, the HHI= (25^2) + (25^2) + (25^2) + (25^2) = 2,500. If the shares are 50 percent, 25 percent, 15 percent, and 10 percent, the HHI = (50^2) + (25^2) + (15^2) + (10^2) = 3,450.

For the weighted average of health plans in the 41 states sampled in the previous study, the HHI increased 28 percent over the period, from 2,282 to 3,184. This conclusion, however, must be tempered by the observation that there is no evidence that concentration of health plans within states is significantly worse than concentration of insurers in other lines of business, generally speaking.4

Nevertheless, the HHI is the first place government regulators look when seeking excuses to interfere in markets. A recently released analysis calculates the HHI for 2010, in both individual and small-group markets. For the small-group market, the analysis calculates a national median HHI of 3,595, a slightly higher measure of concentration than estimated in our previous study (which combined the individual, small-group, and large-group markets). The state with the greatest concentration was Alabama, which a score of 9,175; and the least concentrated state was Pennsylvania, with a score of 1,579.5

Counter intuitively, the states with the highest degree of concentration do not suffer the highest premiums. On the contrary, the correlation between the states’ HHIs reported here and the premiums reported for 2010 in Table 1 is negative 0.16! If federal and state regulators look to the HHI as their key measurement of competition in health insurance, it will lead them to do even more harm to people’s choices than they already have.

Conclusion and Recommendations

Obamacare creates political incentives for politicians in every state to politicize health insurance. They will be highly likely to use their increasing powers over prior approval of rates to artificially lower premium increases while medical costs continue to increase as providers become more responsive to the needs of government instead of patients. Within a very few years after the implementation of Obamacare, Americans will be faced with dramatically fewer choices of health plans. This will have to be resolved by either allowing plans to levy extraordinary rate hikes, bailouts by taxpayers, or just allowing private health plans to shrivel away until a single-payer, government-monopoly health plan appears to be the only viable alternative.

The best way to avoid this outcome is to embrace the change advocated by the majority of the American people: Repeal Obamacare and replace it with reform that puts the American people, and not our government, in charge of our health care.


1 John R. Graham, Bust or Bailout? The Future of Private Health Plans Under Obamacare: With a Focus on Massachusetts and Colorado (San Francisco, CA: Pacific Research Institute, July 2011).
2 Amanda Cassidy, Unreasonable Insurance Rate Increases, Health Policy Brief, Health Affairs (March 31, 2011), pp. 2-4.
3 Henry J. Kaiser Family Foundation, Rate Review: Spotlight on State Efforts to Make Health Insurance More Affordable, p. 7.
4 John R. Graham, Bust or Bailout? The Future of Private Health Plans Under Obamacare: With a Focus on Massachusetts and Colorado (San Francisco, CA: Pacific Research Institute, July 2011), pp. 24-25.
5 How Competitive Are State Insurance Markets?, publication #8242 (Menlo Park, CA: The Henry J. Kaiser Family Foundation, October 2011).

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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