Caruso-Cabrera: Health Care, Prices, and an Answer

The Faustian bargain the health insurers made is already coming due. That was quick.

Health insurance executives are meeting with President Obama today, and according to the NY Times, he’s going to warn them not to raise rates ahead of the new health-reform law going into effect.

“Our message to them is to work with this law, not against it; don’t try and take advantage of it or we will work with state authorities and gather the authority we have to stop rate gouging,” David Axelrod, Mr. Obama’s senior adviser, told the NY Times. Consider this price controls via "moral-suasion" and jaw boning, for now, more to come later if you don’t obey.

Perhaps the industry realizes they are now sitting on the table, rather than at the table. Back when the discussions about health care reform started, the industry agreed to make major changes to their business models in exchange for having a seat at the table of the discussion.

Very specifically, they agreed they would no longer reject customers with pre-existing conditions in exchange for measures that they thought would provide them a bonanza of new customers; either very high penalties on people who choose not to get insurance or very high subsidies to help people buy insurance. This way people would be incentivized to buy their product.

But when the law finally made it through Congress, it wasn’t nearly strong enough to ensure as many new customers as the industry was hoping. And as a further kick in the behind, they are now being told how to price their product.

How does it feel to be eaten? (Read more about the White House meeting here)

I’ve got zero sympathy for an industry that gave up the very core of its business model—the ability to price risk, and also fought against one of the few steps that would have made insurance for individuals more affordable: the ability to buy it across state lines.

Are premiums going up? Yup. And it may be for the very reason the David Axelrod implies, that they are getting them in “under the wire here” before the new law goes into effect. It may also be for the reason the industry cites: many people have lost their jobs and hence their health insurance. The healthiest individuals will go without insurance until they find a new job. Only the sickest individuals will continue to pay for it via COBRA in order to keep it. This is called adverse selection, and it means that the pool of the insured is filled with only the most costly patients.

This last issue—of people losing their insurance when they lose their jobs—is precisely why we need to move away from employer-based insurance. That doesn’t mean we should move toward government-based insurance, however.

There is a much better answer, a consumer driven answer.

We all buy our own car insurance. We buy our own life insurance. We should all buy our own health insurance. We should be able to buy it across state lines.

Consumers would be much happier with the health-insurance market if it were consumer driven. Right now its run by corporations, and slowly but surely, moving toward a command and control model from Washington.

Price controls always result in the same thing: shortages. Whatever you put a price control on, you will get less of; whether its gasoline in the 70s, or health insurance today.

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