NCPA - National Center for Policy Analysis


February 24, 2010

This week President Obama proposed giving the federal government the power to regulate insurance premiums.  Undoubtedly, this will be politically popular -- at least, in the short term.  However, attempts to control prices by government fiat ignore basic economic laws -- and the result could be disastrous for the American health care system, says Michael Tanner, a Senior Fellow with the Cato Institute. 

Insurers unable to charge more for an increasingly expensive product can be expected to trim costs in one of two ways, says Tanner: 

  • They can drop their most expensive customers -- in this case, the sickest, who consume the most health care.
  • Many companies are already doing this, a major source of dissatisfaction with the health care system.
  • In fact, the president wants to prohibit companies from doing this. 


  • They can cut back on their reimbursement rates to hospitals and physicians.
  • But neither doctors nor hospitals, any more than insurance companies, are willing to operate at a loss.
  • If payments fall below their costs, they'll simply stop taking patients.  

One only has to look at government programs like Medicare and Medicaid to see how this works, says Tanner: 

  • Medicare already reimburses at roughly 80 cents on every dollar of actual costs; Medicaid pays even less.
  • As a result, more than a third of physicians have closed their practices to Medicaid patients; 12 percent no longer accept Medicare patients. 

If private insurers begin similarly to cut back their reimbursements, some hospitals may go out of business, and some doctors may close their practices.  Retirement in Florida may begin to look a lot better than another snowy New York winter.  Others will stop accepting insurance or set up "concierge" practices in which they see only a small number of privately paying patients.  Thus, price controls on insurers will ultimately lead to rationing (the lack of available health care goods and services), says Tanner. 

Source: Michael D. Tanner, "Price Controls by Any Other Name," Cato Institute, February 23, 2010. 

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