Reviewing ObamaCare’s Rate Review

This month, the Obama administration began its campaign to ostracize health insurers who don’t charge prices it likes.

The administration now requires insurers who want to raise premiums by 10% or more to post a formal explanation on a government website. Federal bureaucrats — in partnership with their counterparts in the states — will then determine whether the insurers’ proposed prices are “justified.”

The administration refers to this policy as “rate review.” Health and Human Services Secretary Kathleen Sebelius claims that it “promotes competition that can drive down costs.”

A far more apt description of rate review would be “price controls.” And these controls won’t foster competition, as Sebelius claims, but will instead undermine it.

State-ordered reports in Ohio and Wisconsin project that individual premiums will rise when ObamaCare is fully implemented in 2014, thanks in part to the law’s flood of new mandates, each of which drives up the price of insurance. In Wisconsin, the increase in premiums will be so large that a majority of consumers in the individual insurance market will pay more even after the law’s hefty subsidies kick in.

It’s no coincidence that premiums are spiraling up faster than they were prior to ObamaCare’s passage. After rising less than 5% annually in the preceding three years, family insurance premiums are up 9% this year, to $15,073, according to the Kaiser Family Foundation.

In other words, the administration passed a law destined to make coverage more expensive. And now it hopes to use price controls — er, “rate review” — to hold down the premiums it helped send skyward in the first place.

The rules are intended to prevent “unreasonable” rate hikes. But what does that mean? Essentially, whatever regulators want it to.

The federal government can’t actually reject rates — at least not yet. But the feds can bar insurers that implement “unreasonable” rate increases too frequently from participating in the state-based exchanges that are supposed to be up and running in 2014.

Such a move would not expand competition, as Sebelius claims, but rather diminish it.

Even though the feds can’t strike down rates, many states can. And the administration is bolstering their efforts to do so. In February, HHS offered $200 million in funding for states to create rate review programs. This month, it threw in another $109 million — mostly to states that have given themselves the power not just to review rate increases but to block them outright.

The message is clear — states that try to implement price controls will be rewarded by the federal government.

But if they respond to this federal carrot, they’ll destroy their insurance markets — and leave patients and healthcare providers to deal with the damage.

How do we know? Massachusetts already tried to implement a robust system of rate review — with disastrous results.

After enacting an ObamaCare-style health reform law in 2006, the Bay State faced rising health spending and insurance premiums. Spending per individual was 15% higher than the national average last year, and premiums went up between 5% and 10% in the years following the passage of the reform plan.

Last year, Massachusetts officials tried to crack down on health insurance rates, rejecting 253 of 274 proposed rate hikes across the state. Chaos ensued. The small-group health insurance market, which served 800,000 of the state’s residents, briefly shut down. Later in the year, all four of the state’s biggest health insurers reported that they’d lost money as the price caps were implemented. Three explicitly attributed their losses to the state’s rate rejections.

Insurers can’t endure state-mandated losses forever. Eventually, they’ll have to shed jobs or exit the market entirely. Consumers would be left with fewer choices.

Now Massachusetts is attempting to rein in costs through yet another system of payment controls, forcing doctors and hospitals to accept flat-rate remittances for every patient’s care. Such a move will encourage providers to under-serve their patients, according to research published in the Journal of Health Economics.

ObamaCare’s rate review regulations are premised on the notion that rising health insurance premiums are somehow caused by excess profits and wasteful spending. But insurer profits are actually quite small. The Congressional Research Service reports that in 2009, health insurers’ average profit margin was just 2.6%.

The cost of insurance is rising because the cost of health care has increased dramatically. True health reform would’ve addressed this underlying problem.

But ObamaCare didn’t do that. The law’s attempt to control insurance prices directly will only diminish the number of options available to consumers — and thereby result in even higher prices. Some reform.


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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