Wednesday, July 7, 2010

Troubling Precedents

The experiment of health-care "reform" in 2006 Massachusetts was often interpreted as a prototype for Obamacare. Massachusetts has already run into problems that opponents of Obamacare suggested would happen on the federal level: costs overruns, increasing premiums, threats to the sustainability of free-market health-care, and so forth.

As Joseph Rago writes in the WSJ:
The state's universal health-care prototype is growing more dysfunctional by the day, which is the inevitable result of a health system dominated by politics.

In the first good news in months, a state appeals board has reversed some of the price controls on the insurance industry that Gov. Deval Patrick imposed earlier this year. Late last month, the panel ruled that the action had no legal basis and ignored "economic realties."

In April, Mr. Patrick's insurance commissioner had rejected 235 of 274 premium increases state insurers had submitted for approval for individuals and small businesses. The carriers said these increases were necessary to cover their expected claims over the coming year, as underlying state health costs continue to rise at 8% annually. By inventing an arbitrary rate cap, the administration was in effect ordering the carriers to sell their products at a loss...

Mr. Dynan added that "The current course . . . has the potential for catastrophic consequences including irreversible damage to our non-profit health care system" and that "there most likely will be a train wreck (or perhaps several train wrecks)."

Sure enough, the five major state insurers have so far collectively lost $116 million due to the rate cap. Three of them are now under administrative oversight because of concerns about their financial viability. Perhaps Mr. Patrick felt he could be so reckless because health-care demagoguery is the strategy for his fall re-election bid against a former insurance CEO.

The deeper problem is that price controls seem to be the only way the political class can salvage a program that was supposed to reduce spending and manifestly has not. Massachusetts now has the highest average premiums in the nation.

Rago here hits upon a key point: free markets are useful for allocating scarce resources. Unfortunately for many state-run-health-care dreamers, the federal government cannot create more health-care by fiat. Health-care delivery depends upon individuals being able to provide services and other individuals being willing to take these services.

The attempt to put arbitrary caps on the growth of insurance company spending will likely have one or two results: the bankruptcy of insurance companies and/or a decline in the care that individuals may receive. Patrick's health-care caps seem to be putting over half of the major insurance companies in Massachusetts into a kind of death spiral, one that results from state power and leads to further state power. It was in part these artificial caps that caused the insurance companies to post big losses. These losses have then given the opportunity for the state government to seek to oversee the failing company. Arbitrary government mandates distorted the market for the health insurance companies' business, and the only solution (coincidentally enough) is more government control! While this set of policies may benefit government bureaucrats, how much it benefits the citizens of Massachusetts remains unclear.

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