Winning in Regulation

So one of the most perplexing things I’ve been wondering about the Democrat led health care reform has been the absolute refusal to consider how screwed up it is that state regulators impact the health insurance marketplace so much. I do understand the thought behind regulation in general, but in most cases these state insurance regulators do far more harm than good. In most cases, they use their regulatory power to push social agendas rather than ensure the proper functioning of the insurance markets.

One good example of that is something called “community rating”. This is an incredibly stupid idea that essentially forces insurance companies to charge roughly the same premium to people regardless of how risky they are. The equivalent in auto insurance would be to force you to pay the same amount for car insurance as someone with 10 DUIs. Of course insurers don’t have to offer insurance to anyone, but if they do, they must offer it within the same basic rate structure. This is almost certainly what will happen with the health insurance marketplaces. These rules are dumb for a lot of reasons – they deny the ability to underwrite the actual risk which not only means insurers cannot be as precise as they would like but it means there is NO INCENTIVE to be healthy and be a good risk.

A good parallel to this is the property insurance market Florida. Remember that all insurance does is provide a financial tool to spread the risk of losses across a broader group of people so no one person gets burned. Florida decided to over-regulate the pricing of the risky property insurance market has artificially suppressed the pricing of property insurance. State Farm made many attempts to charge what it actually costs to insure property in Florida and was prohibited by the regulator from doing so. What was its response? It took it’s ball and went home. Consumers in Florida now have less choice as a result of state insurance regulator’s trying to make the market do what it’s not supposed to do. Of course it’s even worse than that for Florida taxpayers because the state actually owns an insurance company that was initially supposed to be the insurer of last resort but now will end up taking on insurance needs from everyday home and business owners because of the dwindling insurance capacity from private companies. There just isn’t enough money to go around and insure everyone from the enormous risk that Florida property insurance is. That means the Floridian taxpayer will end up holding the bag for people continuing to build houses in areas prone to hurricanes, flooding, wildfires and other disasters.

Many argue that it’s the evil profiteers who make these decisions. State Farm decides that it can’t “make money” so it pulls out and leaves the poor people of Florida to fend for themselves. Well surprise, State Farm is actually a mutual insurance company. That means the insurance customers actually OWN the insurance company. If they take in too much premium, they are required to return it to the insurance customers. I had it happen many times when I was a State Farm customer. The company didn’t pull out because it couldn’t make money, it pulled out because there was a statistical certainty that it would LOSE money.

There is a well written article on this situation here: http://www.tampabay.com/news/business/banking/article970945.ece

So since there are both high health insurance risks and low health insurance risks it is silly to charge them both the same premium. There are only two outcomes that have ever happened. One, we charge them basically what it costs for a low risk person and the insurance fund loses its shirt. Two, we charge them more or less what is required to cover the high risk person and then the low risk people don’t buy it. Neither of these totally foreseeable results is desirable but one or the other happens in every state where parochial insurance commissioners try to use their government afforded power to change society to their liking.

There are other state insurance laws that punish insurance companies. Some others include mandated health benefits, which require insur­ers to cover particular treatments or particular ser­vices, “any willing provider” laws, which restrict insurers’ ability to exclude hospitals and doctors from their networks and guaranteed issue laws, which require insurers to sell insurance to all potential customers regardless of health or pre-existing conditions. Perhaps more on these later.

Someone once said the definition of insanity is doing the same thing over and over and expecting different results. Let’s pray that Congress actually learns from the mistakes of state insurance regulation to inform the current health insurance reform debate.

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