iOS app Android app More

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors
Marty Robins

Marty Robins

Posted: April 20, 2010 12:05 PM

Medical Insurance Price Controls: Disaster on the Horizon

What's Your Reaction:

There will be many who will applaud the recent actions of Maine insurance Commissioner, Mila Kofman, in requiring health insurers to write individual policies at a loss, and of Massachusetts insurance regulators in denying any increase in premiums, as the sort of concern for the little guy which is needed in today's difficult times. However, those accolades are misplaced, and these actions will prove counterproductive, especially for those they are intended to help. Experience tells us that a far better approach is to avoid interference with market forces and provide direct public assistance for those most in need. All states need to heed this lesson.

In the first place, the requirement of selling without profit is arguably unconstitutional. The Fifth Amendment to our Constitution prohibits our government from taking anyone's property without due process of law. Forcing any firm to sell at or below cost for any reason - no matter how magnanimous - is doing just that. When government needs private property for some public purpose, it must pay fair market value for it, with legal recourse available to ensure that fair value is paid. When a firm is considered to be essential to the public, it is deemed a public utility and its prices or rates are subject to regulation by a public body. Critically, under the Constitution, such regulation is intended to provide the utility with a capped but fair profit or return on its capital. Numerous cases going back to at least the Supreme Court's Penn Central decision in 1978 have held that failing to do so would be ultimately confiscating the utility's capital in violation of the Fifth Amendment. Medical insurers have never been deemed public utilities, so any attempt to impose this sort of rate regulation - even if it provides for breakeven pricing - is clearly unwarranted. Even public utilities are entitled to some sort of profit, so requiring other firms to sell at a loss is unheard of.

More importantly, this approach will fail at its purpose of making coverage more available. Even to the extent that we are legally permitted to control the price of a good or service, we are unable to control its supply. That is, we can not force a firm to remain in a particular market if it does not believe that it is earning a satisfactory return. The shortages of gasoline and other items resulting from the Nixon-era wage and price controls reflect this truism. More recently and in the insurance industry, when in the aftermath of Hurricane Charley, the state of Florida sought to prevent what administrators felt were excessive rate increases by property insurers, several large carriers simply stopped doing business in Florida. There is nothing that can be done to compel an insurer to continue to offer policies at all, if it feels that in doing so, it will incur losses.

If insurers are forced to stop offering insurance because they can not earn sufficient (or any) returns on their capital, the result will be higher prices charged by those remaining and/or forced rationing of care - the opposite of what regulatory action seeks to achieve.

In any event, this regulatory approach is superfluous in that insurance premiums are heavily influenced by broad societal forces, namely the amount of care which is required, and the unit cost of that care. Notwithstanding the rhetoric of many lawmakers and regulators, there is no financial metric indicating that medical insurers are earning "excessive" profits or returns on capital beyond (or comparable to) those realized by firms in other industries. Numerous studies indicate that the large premium increases which we all love to hate, result much more from the claim cost which is incurred for ever-more expensive, but often extremely beneficial care, increasing life expectancies and Americans' self-inflicted maladies such as complications from obesity, poor diets, lack of exercise, smoking and the like, than from any sort of "profiteering". Even with increasing capabilities from medicine, as Americans incur new medical problems and live longer, the aggregate cost of care is driven up, without any benefit to insurers.

It is time for lawmakers and regulators to demonstrate some genuine leadership in health matters, and talk sense to their constituencies, rather than continue spouting this sort of pseudo-populist rhetoric.