Ezra Klein: Will insurers raise rates before health-care reform?

babylonsister

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Mon Mar-22-10 02:28 PM
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Ezra Klein: Will insurers raise rates before health-care reform?

http://voices.washingtonpost.com/ezra-klein/2010/03/will_private_insurers_raise_ra.html

Will insurers raise rates before health-care reform?

Katerina asks:

Is there anything in the bill that will put increased pressure on insurers like Anthem to back away from their intended 40-50% increases this year or will exchange oversight over such increases only begin years from now? (In other words, is there going to be so much time before regulation kicks in that insurers will be able to jack up their premiums like the credit card companies jacked up their interest rates?)

There's nothing the bill will do to roll back past rate increases. But a lot of people are concerned that private insurers will jack their rates up in anticipation of the exchanges. This is not a concern I fully understand, to be honest. The virtue of a competitive market -- that is to say, a market in which it's easy for a lot of people to compare products and prices -- is that this sort of behavior is actually very difficult.

For a rate-raising strategy to work for insurers, you'd need pretty impressive -- and totally illegal -- collusion. They way a market normally works is that if five of six players are overpricing their product, the sixth player will decide to get a whole mess of new customers by charging less, and then her competitors will be forced to follow suit lest they lose their market position. This is even more true given that the subsidies are tied to the lowest-cost plans in, if I remember, the second-to-best coverage tier. In other words, if two plans are holding their costs down and six plans are pushing their costs up, the structure of the subsidies will make it very hard for people to afford the overpriced plans, which will mean those plans will lose millions of customers.

The fear of deceptive rates comes, I think, from the fact that people really, really hate and mistrust private insurers. And they have good reason for that. But private insurers aren't monsters. They're capitalists. And when the rules and incentives of the market change, so too will their behavior.

Update: Economist Austin Frakt notices that there's actually a policy that will directly police rate increases. "The rate reviews that take effect this year (85% and 80% loss ratio minimums in the large and small/individual markets, respectively) would be a means by which to cap rate increases," he e-mails. "Consumers are supposed to get rebates if those minimums are exceeded. Thus, the vast majority of rate increases will have to be justified by actual medical expenses."

That's exactly right, and I should've noticed it. What it means is this: Starting in 2011, insurers will have to spend at least 80% of every premium dollar on medical care. If they don't, they have to rebate the difference to consumers. So a giant rate hike would have to be traceable back to a giant increase in medical receipts. If it's not, all that money would have to be rebated to enrollees, and it wouldn't do insurers any good.