The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

The State’s Role in Health Insurance Rate Increases

Posted by Alan on March 2, 2008

The first part of the year is when the cost of most health insurance policies increase. Most medical plans in most places are seeing rate increases far greater than general inflation. This raises legitimate questions about the sustainability of private health insurance pricing. Increasing faster than other prices means health insurance costs represent a larger percentage of overall spending. This, in turn, impacts the competitive position of American firms and the spending power of American families. That’s one of the reasons comprehensive health care reform needs to be high on the nation’s agenda.

In fashioning reforms, it’s important policy makers look at the complete picture. For example, comparing the rate of rising health insurance premiums inflation to general inflation is misleading. What drives health insurance costs is a complex mix of new technologies, an aging population, increased consumer demand and expectations, greater utilization of medical treatment, the cost of prescriptions in this country and a horde of other factors. Those required to defend health insurance rate increases (no one volunteers for the job) usually point to medical care inflation as a more appropriate benchmark than using general inflation. The problem with this defense is that, recently, premiums have increased at rates higher than medical inflation. This discrepancy was pounced upon by some legislators during hearings on health care reform in California this year. Clearly, the lawmakers implied, this is evidence of the industry’s lust for profits. What’s required, they say, is a governmental smack down. (OK, they didn’t actually use the word “smack down,” but premium regulation amounts to the same thing).

Before lawmakers get too carried away, however, they should look at their contribution to rising health insurance costs. Leave aside the costs related to mandated benefits, regulatory compliance and the like. Those are significant, but obvious. What’s less apparent is the government’s use of private insurance to subsidize public programs.

Medicare and Medicaid make up 55-to-60 percent of the average hospital’s revenues according to Richard Umbdenstock, president and chief executive of the American Hospital Association. As reported by the Todelo Blade, Mr. Umbdenstock said this would require providers to shift more costs to private insurance. In other words, when government budgets get tight, they cut back on what they pay doctors and hospitals to provide care to Medicare and Medicaid enrollees. Some of those providers reduce the number of such patients they’re willing to see — or stop serving them all together. That’s bad enough.

Others, however, shift the cost to those with private coverage. With more than half their income generated by government programs, it means a disproportionate amount of increase on private plans is required to make up for public cutbacks. If 60 percent of a hospital’s income flows from public programs, a 10 percent reduction in reimbursement rates requires increasing charges to private insurers by 15 percent. And that’s before increases based on medical cost inflation, general inflation or any other factors. It’s a rate increase entirely generated by governmental action.

This system actually works well for politicians. They get to cut government spending by undercompensating medical providers treating public program patients and they get to complain about “indefensible” rate increases by greedy private health plans. In other words, they get to pitch the problem, avoid having to catch it, and they can criticize the people that do.

Politicians who want to control both sides of the equation — cut back on public program funding and regulate private health insurance premiums — should be careful about what they wish for. Their own contribution to skyrocketing medical insurance premiums will be much more obvious. They’ll have to catch the problems they create  and they’ll be on the receiving end of the criticism, too.


3 Responses to “The State’s Role in Health Insurance Rate Increases”

  1. Jesse said

    government is almost always more expensive than the private sector. and data from the CBO is dubious at best. just look at the numbers they cited for the bailout. they said it would cost taxpayers $25 billion! how much further off could they be!

    besides, you don’t have insurance for an oil change, or your plumbing in the house. insurance is for accidents, catastrophies, etc. universal healthcare is a farce. i don’t want to be included and i need the money i make to take care of myself and those around me, not people in the next state.

    more to the point….healthcare is not a government function, the problem with healthcare is that it is expensive, its not a right its a service, and politicians aren’t doctors!

  2. Tom Coats said

    Data from the CBO show that increases in government spending on health care very closely match that of the private sector. If cost shifting is a problem as you suggest wouldn’t costs for private care be growing faster than for government care?

  3. Jesse said

    “The federal government decided long ago that it knew how to manage your health care better than you and replaced personal responsibility and accountability with a system that puts corporate interests first. Our free market health care system that was once the envy of the world became a federally-managed disaster.

    Few people realize that Congress forced Health Maintenance Organizations (HMOs) on us. HMOs rose to prominence through federal legislation, incentives, and coercion.

    Now, the Food and Drug Administration’s bias toward large pharmaceutical companies enlarges their power, limits treatment options, and drives consumers to seek Canadian medicines. Regulations from D.C. make it virtually impossible for small business owners to cover their employees. Thanks to government interference in the health care market, many Americans, including the unemployed and those who work for small businesses, cannot afford health insurance. This causes the uninsured to seek basic medical care at already overcrowded emergency rooms, further driving up health care costs and causing premiums to rise for those with insurance.”

    “The story behind the creation of the HMOs is a classic illustration of how the unintended consequences of government policies provide a justification for further expansions of government power. During the early seventies, Congress embraced HMOs in order to address concerns about rapidly escalating health care costs. However, it was Congress which had caused health care costs to spiral by removing control over the health care dollar from consumers and thus eliminating any incentive for consumers to pay attention to costs when selecting health care.”

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