Tuesday, February 9, 2010

Administration Criticizes Rising Premiums — But Will Their Bill Make Things Worse?

Various press stories today have reported on the letter which HHS Secretary Sebelius sent to Anthem Blue Cross asking the insurance carrier to justify its proposed rate hikes in California.  Keeping aside the larger issue of whether the Administration is continuing to use insurers as political scapegoats to justify its government takeover of health care, it’s worth examining the causes of these increases.  Specifically, this morning’s LA Times quotes an Anthem representative as saying the carrier’s “costs have been driven up in part because the weak economy has led many people in good health to forgo coverage, leaving those with greater medical needs in its pool of customers.”

The Senate bill the Administration has endorsed would likely make this bad situation worse.  Individuals could cancel their policies to save money—paying a tax of only $750 per year for doing so—knowing full well they could buy coverage when they needed to, as insurance companies would be required to accept all applicants and could not charge differing rates.  In fact, a Wall Street Journal editorial last July cited evidence that individuals in Massachusetts—the only state with an individual mandate—are doing just that; one of the Commonwealth’s carriers found data indicating that 40% of its new applicants kept their policies for under five months, and incurred about six times their expected expenses, suggesting the healthy only bought coverage after becoming sick (and promptly dropped it once their illness was treated).  As a result of this insurance “death spiral,” premiums will rise faster than they otherwise would, chasing off more healthy customers and leading to yet another spike in premiums.

Thus the perverse incentives included in the Senate bill raise a fundamental question: With the Administration criticizing Anthem’s “extraordinary [premium] increases,” why do Democrats persist in advancing policies that would only make the situation worse?