HEALTH REFORMERS' WORST IDEA

March 1, 2010

One of the worst ideas President Obama and Democrats have come up with is federal price controls on health insurance, says Michael F. Cannon, director of health policy studies at the Cato Institute. 

Both the House and Senate health care legislation would prohibit insurers from discriminating against people with preexisting medical conditions.  Insurers would have to charge everyone in a given age group the same premium -- say, $10,000 -- whether an enrollee costs $5,000 or $25,000 to insure.  That's a price control, says Cannon. 

Larry Summers, one of President Obama's top economic advisers, spoke for most economists when he said, "Price and exchange controls inevitably create harmful economic distortions.  Both the distortions and the economic damage get worse with time." 

  • Experience shows that, over time, price controls cause health insurance markets to collapse by driving healthy people from the marketplace; for example, a recent analysis found that a New Jersey program setting insurance prices without regard to health status appears to be collapsing.
  • Likewise, the president's latest reform proposal would increase premiums for healthy people, create financial incentives of as much as $10,000 for them to drop out of the market, and permit them to buy coverage at standard rates whenever they get sick.
  • Once they drop out, premiums would rise further, causing more healthy people to drop out, and so on in a vicious cycle. 

Even if the president could force healthy people to buy coverage, his price controls would hurt the very people he pretends to help, says Cannon: 

  • Yes, insurers would technically be required to cover each $25,000 patient for $10,000.
  • But if you think insurers mistreat the sick now, just wait until price controls turn every single sick person into a $15,000 liability.
  • Insurers would go to even greater lengths to avoid and dump the sick; those that didn't would go out of business. 

Price controls will not change the economic reality underlying high insurance premiums -- i.e., that some patients file especially expensive claims.  They will merely lead people to respond to that reality in even less desirable ways.  And they will discourage innovations that actually help sick patients, says Cannon. 

Source: Michael F. Cannon, "Health reformers' worst idea," Philadelphia Inquirer, February 25, 2010.

 

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