The President’s New Healthcare Plan

In anticipation of the healthcare summit details of the plan that the president will propose are beginning to come out:

WASHINGTON — President Obama will propose on Monday giving the federal government new power to block excessive rate increases by health insurance companies, as he rolls out comprehensive legislation to revamp the nation’s health care system, White House officials said Sunday.

The president’s legislation aims to bridge differences between the bills adopted by the House and Senate late last year, and to frame his debate with Republicans over health policy at a televised meeting on Thursday.

By focusing on the effort to tighten regulation of insurance costs, a new element not included in either the House or Senate bills, Mr. Obama is seizing on outrage over recent premium increases of up to 39 percent announced by Anthem Blue Cross of California and moving to portray the Democrats’ health overhaul as a way to protect Americans from profiteering insurers.

I have little doubt that the move will be popular. I’m not as confident that it would be effective even if it were to be enacted into law. If the rates are set above the market clearing price, it’s yet another case of private profits and public costs. If the rates are set below the market clearing price, it will create shortages. How confident are you in the ability of the central planners to set rates correctly?

And that it will be enacted into law isn’t a done deal. Clearly, this would be a new bill, would need to be passed by both houses of Congress, and it would effectively required 60 votes in the Senate to pass. Will Congressional Republicans find this approach appealing? It’s hard for me to imagine that they will.

Even Republicans more moderate than those in Congress are troubled by the approach. For example, James Joyner see it is bizarre:

This would, in effect, turn private health insurance companies into public utilities. And, while that makes some sense in the case of monopoly providers for vital services where efficiencies won’t allow multiple competitors — multiple power grids and the like are not feasible — it’s truly a bizarre idea in a field, such as health insurance, where dozens of providers exist and the barriers to entry for other competitors are relatively low.

It’s not unprecedented. After all, half of the states already regulate healthcare insurance premium rates to some degree. And healthcare insurance premium rates are regulated strictly in OECD countries other than the United States.

I think it also bears mentioning that the president’s actions fully vindicate the view of those who predicted that, after letting the Democrats and Republicans in the House and Senate duke it out over their versions of healthcare reform, President Obama would swoop in with a plan of his own. IIRC that’s a component of the community organizer theory of the Obama presidency.

It remains to be seen whether the strategem will prove effective.

I also don’t think it can be said often enough: healthcare insurance premiums rise as healthcare costs rise. If you want insurance premiums control the rate of change of healthcare insurance premiums, you must control the rate of change of healthcare costs.

That healthcare premiums are rising faster than healthcare costs as in California is not a contradiction of that simple fact of insurance. It stands to reason that premium increases are front-loaded, i.e. that, if insurers anticipate future increases in healthcare costs, they will increase premiums now. Rather the move is a vote of no confidence in the bills that are currently under consideration do much about restraining increasing healthcare costs.

12 comments… add one
  • PD Shaw Link

    Self-insurance plans, and presumably union benefit plans, are already regulated by the feds and not the states. Of course, those are high benefit, high value/premium plans, with no low insurance overhead costs. These are also plans that are not subject to state mandates. If that’s the direction Obama wants to take the health insurance industry, then state regulation should be preempted across the board.

  • Michael Reynolds Link

    It’s interesting political jiu jitsu, isn’t it? Now a “no” vote is a vote for higher premiums. You can base a pretty good 30 second spot on that. “Congressman Mordor voted for higher health insurance premiums.”

    Interesting at that level.

    As for the policy, if you keep down premiums you force efficiencies and then you force the company to push back harder against the hospitals which would then also be forced to find efficiencies. Aren’t those both paths to lower overall health care costs?

    Right now consumers lack the ability to push back against premium increases. The rates are not just set in response to rising costs, they are also set in hopes of maximizing profits. An insurer hoping for profit in that environment would have to improve its efficiency, pay lower reimbursements to hospitals, and therefore lower overall costs. No?

  • PD Shaw Link

    michael, I believe what you’ll get is the opposite. An insurance company that’s paying 100% of medical costs and let’s say 4% insurance overhead is going to get their rate increases approved, whatever they are.

    My local gas utility used to spend a lot of time trying to acquire natural gas at the cheapest price, such as exploring alternative suppliers, entering long-term contracts or hedging with different instruments. Under new ownership they decided that this was all a waste of time under the price regulations, since they could buy natural gas at whatever the market price was and satisfy the regulators so long as their own expenses were kept in line. That’s what I would expect to happen here; no cost controls on health care providers (’cause that’s how the insurance company would lose it’s customers) and a focus on minimizing health care insurance costs.

  • An insurance company that’s paying 100% of medical costs and let’s say 4% insurance overhead is going to get their rate increases approved, whatever they are.

    That’s exactly right. Not only that but insurance companies will be able to argue persuasively that they must have reserves (in the form of premiums paid) to cover anticipated cost increases rather than simply covering costs. In other words, as long as healthcare prices are rising and expected to keep rising insurance premium rates must rise, too, and faster than healthcare prices so as to keep up with them.

    Premium payments don’t just pay for this year’s costs. They pay for next year’s costs as well.

    But here’s a question. If you’re going to try to regulate costs indirectly, why not just regulate them directly? Why not impose wage and price controls in the healthcare system? Don’t mistake my question as advocating that approach. It’s just a question.

  • Brett Link

    How confident are you in the ability of the central planners to set rates correctly?

    The French and German systems seem to do it pretty well. Canada technically negotiates rates with the doctors’ associations on the provincial-level, but the results aren’t bad.

  • WASHINGTON — President Obama will propose on Monday giving the federal government new power to block excessive rate increases by health insurance companies, as he rolls out comprehensive legislation to revamp the nation’s health care system, White House officials said Sunday.

    I too favor over-use of scarce resources!

    Thumbs up from me.

  • The French and German systems seem to do it pretty well. Canada technically negotiates rates with the doctors’ associations on the provincial-level, but the results aren’t bad.

    I love these kinds of non-answers.

    The results are not bad, the results seem to be okay. Seem to work.

    Bullshit.

    France, German, and Canada are all looking at the same problem we are, just not to the same degree. Or the metaphor I like is that we are closer to the abyss and going faster than France, Canada and the rest. Sure its better, but unless they change too they’ll sail right over the edge after us.

  • Andy Link

    A 39% increase sounds like a lot until one considers it only represents 4-6 years worth of health care cost growth.

  • As for the policy, if you keep down premiums you force efficiencies and then you force the company to push back harder against the hospitals which would then also be forced to find efficiencies. Aren’t those both paths to lower overall health care costs?

    Or you force firms to close up and move resources to the next best option. Its called opportunity cost.

    Right now consumers lack the ability to push back against premium increases. The rates are not just set in response to rising costs, they are also set in hopes of maximizing profits.

    Do you even know what maximizing profits means? I don’t think you do. Please tell us what maximizing profits means for a firm? If you think it means setting the highest price possible that is the wrong answer.

    An insurer hoping for profit in that environment would have to improve its efficiency, pay lower reimbursements to hospitals, and therefore lower overall costs. No?

    Or shut down. The next letter you could get is saying, “Sorry we are no longer doing business in California, good luck with your next insurer.”

    Nothing says these firms have to stay in business, especially at a price that is going to result in losses.

    Also you have no clue about the regulator process. Why don’t you look at the history of electricity prices where you live. Electricity rates have gone up 20% or more depending on where you live and what rate you are on. Why? Costs. The utilities went to the PUC and the legislature and said, “Hi, this is established rate doctrine. The courts like it. We will win if we go to court to get these increases because you made us do this stuff that has caused these rate increases.” And after much dithering and hand wringing and some fist shaking the PUC and state legislature said, “Okay, here increase rates this way.”

    Oh and as added bonus, the rich people–i.e. people like you–got royally screwed over. Some saw 200% increases in their bills. And all those increases were deemed reasonable.

  • steve Link

    Steve-What then to do about lemon dropping? You seem to be assuming that all these rate increases are on the up and up. Why not apply some of the skepticism you hold for govt to those who make big bucks by being dishonest.

    Steve

  • Brett Link

    France, German, and Canada are all looking at the same problem we are, just not to the same degree. Or the metaphor I like is that we are closer to the abyss and going faster than France, Canada and the rest. Sure its better, but unless they change too they’ll sail right over the edge after us.

    So you admit they’re doing it better? Thanks.

  • So you admit they’re doing it better? Thanks.

    Yes, I admit they are going broke slower than us. If that is your definition of doing “well” then you have a very, very low bar.

    What then to do about lemon dropping? You seem to be assuming that all these rate increases are on the up and up. Why not apply some of the skepticism you hold for govt to those who make big bucks by being dishonest.

    Uhhhmmm becuase that is the trend and it is due to the incentives we’ve built into the system with the tax exempt status of employer provided benefits, subsidizing care for a very large demographic that are some of the most intensive users, treating everyone irrespective of ability to pay, etc. The incentives are currently set up to push costs higher.

    Turning health care into a regulated utility wont solve the probelm in that regulated utilities have to serve all demands of customers and are ensured of a given rate of return. That is, their rates will be set up to recover their costs pluse the rate of return. Any years where the return is below or above that rate of return will go into a balancing account. The health insurance “utilities” will get their money in this case, it is guaranteed by law.

    In other words, President Obama’s solution sounds good to the ignorant such as Michael, but to those who already work in the utility industry we know it wont change a goddamned thing. Well unless they are lying and the young and healthy with few assets and not much income really are buying up insurance at increased rates. That is where your hope rests, that even what Paul Krugman is saying is not true. That people just can’t wait to buy insurance.

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