What’s the Matter with California’s Sick Health Insurance Market?

Health insurers across the country have begun warning of major premium increases as Obamacare kicks into high gear this year and next. Consumers in multiple states will see rate increases of 20 percent or more, and some could see their premiums double.

Government health officials are outraged — and nowhere has that outrage been louder than in California. At a press conference this month, state insurance commissioner Dave Jones attacked Anthem Blue Cross for announcing rate hikes averaging 10.6 percent for about 52,000 of the 250,000 Californians it covers. Other insurers, including Aetna and Blue Shield of California, have also announced large premium hikes.

Why are California’s rates going up? Jones blames Obamacare — not for regulations it contains but for rules it doesn’t. The federal law gives state insurance regulators the power to review premium hikes but not to reject them. Jones calls that a “glaring loophope.”

Would things be different if Obamacare gave state regulators the power to say “no” to insurers? The answer is no. To see why, we can look at the experiences of the 37 states that already give their insurance regulators the power to reject rate hikes.

Take New York, which is among the most heavily regulated insurance markets in the country, and Massachusetts, which has been running its own version of Obamacare since 2006. Officials in both states have the power to reject hikes. Yet each has had some of the highest premiums in the nation for years.

The same goes for Ohio and Florida. Both have the power to reject premiums — and both have recently seen premiums go up 20 percent or more.

Giving regulators more power isn’t the answer.

So what explains the higher premiums? It’s certainly not profits. For the filing in question, Anthem’s profit margin was just 1.2 percent.

Even with proposed rate hikes of up to 20 percent, Blue Shield, one of California’s biggest non-profit health insurers, expects to lose money this year.

Rather, the steadily increasing cost of health care is to blame. Higher prices for healthcare services account for a substantial portion of Anthem’s proposed rate increase — more than a fifth, in fact.

After two years of slowing growth, the cost of every major category of care began to rise more quickly in 2011, according to a study by the Health Care Cost Institute. The cost of prescription drugs rose by 1.2 percent. Outpatient visit prices went up 5 percent; for inpatient visits, 5.6 percent.

When healthcare prices go up, so do the premiums that eventually pay for those services. If hospitals are charging more, insurers have to respond.

Premiums also increase when the law obliges insurance policies to cover more benefits. And Obamacare mandates a whole lot of generosity — including “free” preventive care and required coverage for adults up to age 26 on their parents’ plans.

But “free” care and mandated benefits cost quite a bit, especially in the individual market, where many of Obamacare’s newly covered are expected to get their insurance. Aon Hewitt, a consultancy, estimates that individual market premiums will go up by about 5 percent as a result of the healthcare law.

These early hikes are a preview of things to come in 2014, when the bulk of Obamacare — including the individual coverage mandate and the health insurance exchanges with their essential health benefits rules — comes into force.

The exchange planners want people to equate exchanges with affordability. Indeed, the tentative tagline for California’s exchange — called “Covered California” — is “your destination for affordable health care.”

But the reality is just the opposite. State officials have already admitted that they expect some policyholders to pay significantly more once the Golden State’s marketplace is up and running.

In constructing its exchange, California divided the state into “rating pools” — geographic areas where premiums are linked.

So Golden State residents better hope that they have healthy neighbors, because the sicker the area, the higher the premiums. Premiums could go up by 22 to 25 percent for individuals living in West Los Angeles and Sacramento.

And premium hikes like these may only be the beginning. Blue Shield is warning that the influx of new customers expected to arrive in 2014 once the state’s exchange is up and running will bring higher costs.

Unfortunately, for many Californians, the future is now. Thanks to Obamacare, higher health insurance costs are already here.

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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