The recently published U.S. Department of Health and Human Services regulations for implementing Obamacare’s health insurance rate reviews, effective September 1, are another instance of the arbitrary and politically manipulated regulations that inevitably result when Congress enacts vague, subjective, and aspirational legislation rather than clear, objective, and specific statutes.
Political Pressure on Premiums
These rate-review provisions were an entirely political exercise from the start. They were only added to Obamacare in the fall of 2009—after the health-insurance industry had the temerity to point out other provisions of the legislation would drive up premiums—in order to give HHS authority to review so-called “unreasonable” premium increases (but not the authority to block those increases, nor did it provide a definition of “unreasonable”). Blame for Obamacare’s inevitable cost increases could thereby be deflected onto insurers.
These provisions have negative practical implications. For example, the proposed rule setting an arbitrary 10 percent price-increase threshold could cause insurers to target rate increases to just below the limit. One well-documented effect of price controls is that sellers respond to the imposition of price “ceilings” by turning them into price “floors.” The less competitive the market on which price controls are imposed, the sooner that phenomenon occurs.
Under these regulations, any rate increase of 9.9 percent or less will not trigger a burdensome, publicized federal rate review, so why should an insurer limit a rate increase to, say, 6 or 7 percent? Theoretically, competitive pricing pressure might discourage such behavior. But these and other Obamacare insurance regulations will reduce competition by driving smaller carriers out of the market, and after 2014 the remaining insurers will be selling to customers who are required to buy their products.
Thus, the perfectly rational response will be for the remaining insurers to have 9.9 percent annual premium increases ad infinitum.
Ignores Insurer Solvency
These regulations are contrary to even the legitimate purpose of insurance-rate supervision, which is to make sure carriers charge high enough premiums to cover their claims costs. In a competitive insurance market, regulators don’t have to worry much about possible “price-gouging,” since competition checks such behavior. However, regulators do need to be concerned about insurers trying to attract more business by under-pricing coverage while complacently underestimating their future losses—the actuarial equivalent of “rosy scenarios.”
The danger is that if premium income isn’t sufficient to cover claims costs, an insurer risks becoming insolvent. That harms everyone, including policyholders or taxpayers who can be left liable for claims the insurer can’t pay.
Thus any rate-regulation regime that focuses only on holding down rates while ignoring insurer solvency is inherently dangerous. HHS admits this is a serious flaw in the statute: “We acknowledge that inadequate rate increases can be problematic,” but it blithely dismisses those concerns, arguing the statute “does not identify adequacy among the criteria to be considered when determining unreasonableness.”
Case for Defunding
Fortunately, this bad idea is one of many in Obamacare that can be defunded. Included in Obamacare’s $105 billion of advanced appropriations was $250 million for HHS to distribute in grants to state insurance regulators to implement stricter rate regulation. The purpose of those grants is to bribe state insurance departments into enforcing Obamacare’s new federal price controls.
Last summer, HHS distributed $46 million of that $250 million to 45 states and the District of Columbia ($1 million to each) in the first round of rate-review grants. HHS says it intends to award a second round of grants in the fall. Congressional appropriators should intervene and rescind at least the remaining $204 million earmarked for rate-review grants.
The five states that did not apply for the first round of grants (Alaska, Georgia, Iowa, Minnesota, and Wyoming) should continue to refrain from doing so, and states that received the initial funding should follow the lead of Oklahoma’s Insurance Department and return the money. Doing so is in the interests of state lawmakers, who should want to preserve the independence and integrity of their state insurance departments in light of the inherent conflicts that will arise between the new federal rate regulations and existing state insurer-solvency laws.
Edmund F. Haislmaier ([email protected]) is a senior research fellow in the Heritage Foundation’s Center for Health Policy Studies. Article reprinted with permission from heritage.org.