State insurance commissioners have long seen themselves as protectors of the public's wallets – the officials who say "no" to insurers' requests to increase health insurance premiums. It has not yet sunk in that on this coming New Year's Day, the Affordable Care Act will flip the commissioners' motives upside-down, prompting them to approve and even encourage premium increases.
Recently, I opined that the ACA may give health insurance companies the virtually limitless power to tap the U.S. Treasury, as the health care law perversely turns competition in the exchanges into a race to raise premiums, not lower them. One critic took exception with my argument. Insurance regulators, he contends, will hold the line against the insurers.
His assertion makes perfect sense until the clock strikes midnight on December 31, 2013. At that point, the ACA will stand the commissioners on their heads and drop us all into a new world of radically altered incentives.
Health insurance subsidies will only be available for those purchasing health insurance on the new individual exchanges, rebranded as "marketplaces," reachable through healthcare.gov – assuming that the problematic website can be repaired.
Under the ACA, a family of four with $30,000 in income will only pay $600 for, say, a $10,000 insurance policy. The federal government will cover the remaining $9,400. Under the "medical loss ratio" rules, the insurer can keep $2,000 for overhead and profit. The remaining $8,000 must go to health care providers – doctors, hospitals, therapists, etc.
Now, suppose the insurer raises the premium to $20,000. The family of four will still pay only $600. The federal government absorbs 100 percent of the increases and must now kick in $19,400 instead of $9,400. The insurer doubles payments to providers by paying higher reimbursement rates and by expanding the menu of benefits, e.g.: more tests, more surgeries, lengthy spa visits, whatever.
Again, the enrollee pays no more for insurance, but providers get $16,000 in income rather than $8,000 – and insurers retain $4,000 instead of $2,000. Plus, the enrollee gets much more generous benefits. Everyone in the state is happy. No insurer has any motive to reduce premiums, since no purchasers will benefit. The only loser is the U.S. taxpayer, who must pay for these swelling costs.
In a more extreme scenario, where insurance premiums rise from $10,000 to $60,000, providers' revenues would rise from $8,000 to $48,000, and the insurers' take would rise from $2,000 to $12,000. (This is actually where some insurance rates in New York went after an ACA-like reform in the 1990s.) But in the real world, perhaps it's unrealistic to assume a 500 percent increase in premiums. Still, a 25 percent or 50 percent increase is not hard to imagine, and that alone would represent a massive increase in the cost of health care.
Some critics argue that my swelling-premiums scenario would never occur because state regulators would never approve such increases. But why not? Until now, commissioners were strongly motivated to hold the line on costs. Until now, forbidding insurers to raise premiums meant more money in the wallets of the state's voters and possibly the state's health care providers, too. Now, however, the commissioner who insists on lower premiums reduces the amount of care available to subsidized voters and doesn't save them a dime. Because of the ACA's bizarre structure, higher premiums now mean better benefits for subsidized enrollees; higher incomes for doctors, hospitals, other providers and insurers; and higher state tax revenues from now-richer providers and insurers.
The only negative is that the state's voters will bear a small share of the added burden on the U.S. Treasury. But since your state will be paying for the profligacy of the other 49 states, why not grab your piece of the cash along with the rest?
An insurance expert told me that he was skeptical about whether my premium-upping argument would play out in the real world – but after some thought, he said my logic made sense. He couldn't rule out the scenario. And that's the point. Under the ACA, explosive growth in health insurance costs may or may not happen – but it makes sense and cannot be ruled out – and evidence continues to accumulate that the American economy is bowing under the weight of the ACA's uncertainties.
Robert F. Graboyes is a senior research fellow with the Mercatus Center at George Mason University and professor of health economics at Virginia Commonwealth University, the University of Virginia, George Mason University, and the George Washington University.