The role of prices in the market

At the heart of President Obama's drive to rein in health costs is a proposal for federal review and regulation of health insurance premiums, with a new agency empowered to block excessive rate increases, says the New York Times.

State officials are leery of the proposal, which raises a host of questions: How would Congress define "excessive?" How would the new federal power relate to state insurance regulation?

The proposal has great political appeal, says the Times. But experts see a serious potential problem – federal officials will focus on holding down premiums while state officials focus on the solvency of insurers, the ultimate consumer protection:

  • Economists say that holding down premiums does not necessarily hold down the cost of care, which reflects the prices charged by doctors and hospitals and the volume of services.
  • State officials worry that they would be left to police the solvency of health insurance companies while federal officials pressured insurers to reduce premiums, as Obama has done in recent days.

    "You can't separate the underlying solvency of companies from the rates they charge," says Sean Dilweg, the insurance commissioner in Wisconsin. "The federal proposal would be a huge pre-emption of decisions that states have made over their history."

    Mary Beth Senkewicz, a deputy insurance commissioner in Florida, says, "If you divorce rate-setting from financial oversight, that's a fundamental flaw."

    "Premiums must be reasonable in relation to the benefits," Senkewicz says. "That becomes a fairly complex analysis."

    Insurance commissioners say they fully support efforts to expand coverage and rein in health costs, but it would be risky to hold down premiums before costs were under control. And they do not expect the federal legislation to drive down costs anytime soon.

    Sandy Praeger of Kansas, one of several insurance commissioners who met with Obama at the White House last week, says "You are not necessarily helping the consumer if you keep rates artificially low. What's worse for the consumer: Having a premium increase or having to pay the full amount of a medical expense because the company is out of business?"

    Source: Robert Pear, State Insurance Experts See Flaw in Obama's Plan to Curb Health Premiums, New York Times, March 8, 2010.

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    First published by the National Center for Policy Analysis, Dallas and Washington, USA

    FMF Policy Bulletin/ 16 March 2010
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