Price Caps Will Only Cap Availability of Insurance

Earlier this month, the California Assembly voted to give the state insurance commissioner the power to reject health insurance rate hikes that he deemed “excessive.” The state senate must now take up the measure, known as AB 52.

A week later, AB 52 effectively went national. Sen. Dianne Feinstein (D-Calif.) introduced a similar bill that would grant both state insurance regulators and the federal Department of Health and Human Services the authority to block rate increases.

Both legislative proposals purport to protect consumers from unreasonably expensive insurance premiums. But they amount to little more than price controls that will reduce the availability of insurance — and do nothing to make it more affordable.

AB 52 represents the fourth attempt by California’s Democrats to regulate health insurance rates in the state. This time around, no Republicans supported the measure, and several Democrats refused to vote.

Given the state’s colossal $9.6-billion budget deficit — and the fact that the next fiscal year starts Friday — lawmakers would appear to have more pressing issues to address.

Insurers have duly noted the legislature’s determination to go after them — and are attempting to limit the potential damage. In a public-relations coup, Blue Shield of California announced that it would cap its annual profits at 2%, rebating anything left over to its customers. The “nonprofit” insurance company proudly stated that it was “setting an example that may challenge others to consider what changes they can make.”

Sounds like a great deal for consumers. And initially, it may be, as policyholders could enjoy discounts of anywhere from $25 to a few hundred dollars.

But profits represent a nearly infinitesimal proportion of insurers’ revenues. According to Fortune magazine, the insurance industry posted a measly 2.2% profit margin in 2009.

Blue Shield’s profit margin was just 3.1% last year. So it’s not exactly emptying its coffers to pay rebates. And as a nonprofit, Blue Shield already saves money that its for-profit competitors have to remit as taxes.

More important, Blue Shield exercises tremendous market power. It’s the third-largest health insurer in California. If Blue Shield suppresses its premiums with rebates, smaller competitors may not be able to match its prices — and may thus be driven out of business.

Officials may bid good riddance to these smaller firms, but consumers will be left with fewer choices, and well-established firms like Blue Shield will enjoy even more market power. In the long run, consumers would perhaps face higher prices and lower-quality service, as the biggest insurers would have fewer rivals to check their prices and offerings.

Similarly, if lawmakers succeed in capping insurance rates, the marketplace will lose yet more insurers. They can’t operate at a loss for very long. So if state officials reject the rates an insurer needs to stay solvent that firm may simply stop selling policies.

ObamaCare makes federal and state efforts to cap rates even more complicated because the law mandates all sorts of costly benefits. Insurers are effectively being forced to offer more generous coverage — but not being allowed to charge for it.

The Congressional Budget Office estimated that the law would drive individual insurance premiums up by as much as 30% because it required policies to cover more and share fewer costs with beneficiaries. The mandate forcing insurers to allow policyholders’ children to remain on their parents’ plan until age 26, for instance, will bump premiums up one percent all by itself.

For certain demographic groups in several states, ObamaCare’s impact could be even larger. The insurer WellPoint calculated that the law’s mandates would cause premiums for a young, healthy 25-year old male in Los Angeles to more than double.

Already, insurance markets throughout the country are falling apart — even before these proposed rate caps come into play. In 34 states, at least one insurer has left the market for child-only policies because of the law’s requirement that firms accept all comers, regardless of health status or history. In 20 states, child-only policies are no longer available.

With the cost of health insurance rising without pause, policymakers’ desire to cap premium hikes is certainly understandable. But it’s an ineffective remedy to our country’s health cost crisis. Price

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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