The health care reform “compromise” put forward by the Obama administration in advance of this week’s bipartisan summit contained little that was new and much that was the same in its relentless push to nationalize and thereby destroy the flawed, but still quite good U.S. health care system. One new twist would certainly make matters worse: President Obama wants to empower the federal government to block insurance rate increases deemed “unreasonable” or “excessive.” This would combine two bad ideas: price controls and rejection of the rule of law. That combination is far more “unreasonable and excessive” than any price hike private insurers are likely to make.
Many other commentators have explored the problems that price controls would cause. To summarize, it is nearly certain that if private insurers cannot raise rates in response to rising costs, which are often the result of the already excessive role played by government in the health care system, they will respond in one of several ways. They will look for other sources of revenue, as the credit-card companies have done in response to new restrictions on interest charged. (Some have reinstated or hiked annual fees.)
If new revenues cannot be found, insurers will have to limit the quantity of service they supply, just as basic economics suggests will happen under price ceilings. Normally this would take the form of either denying coverage to potential or existing patients, or reducing other benefits and services. However, if the legislation prohibits those responses, insurers will eventually lose enough money that they will want out of the health insurance business altogether. Of course this might be precisely what supporters of Obama’s plan are hoping for, since it would provide the rationale for a more complete nationalization of the health care industry.
Of course, the legitimate way to control premiums would be to open health insurance to true interstate competition. In genuinely competitive markets, the long-term trend is more value at lower prices.
The Rule of Law
The economics of price controls aside, what’s really unreasonable and excessive about Obama’s proposal is that it gives discretionary power to bureaucrats, undermining the rule of law. The proposal calls for creation of a Health Insurance Rate Authority, which would decide what rate increases are “reasonable.” The new entity would have the authority to recommend to the secretary of Health and Human Services or state governments that “excessive” increases be blocked or require that companies change their rates and/or refund difference.
In a free society government is supposed to operate according to the rule of law. This requires, among other things, that its policies be known in advance and be applicable to all, including government itself. A price-control scheme in which insurers cannot know in advance whether their rate increases are legal, or must get approval by seven people with the power to determine if an increase is “reasonable,” substitutes the rule of men for the rule of law.
The members of the Authority would have no objective way of determining what’s reasonable. Such decisions would inevitably be subjective and open to influence from various constituencies. That is exactly what the rule of law should ideally avoid.
No one should have such discretionary power in a free society, or even in a semi-free one like ours. The price of a service such as insurance should be negotiated between seller and buyer, like any other price on the market. If consumers don’t like the price, they can take usually take their business elsewhere. Of course with health insurance being linked to employment, most individuals do not have that option. That, however, does not justify price controls. Rather it provides even better reasons to eliminate the tax-code distortions that link employment and health insurance and to allow a competitive nationwide market.
When the State steps between buyer and seller, we get bad economic consequences along with growth in unreasonable, excessive, and discretionary government power. The rule of law has been undermined enough in our increasingly statist economy. A world in which whatever is not explicitly permitted is prohibited is the antithesis of a free society. Obama’s proposed oversight board for insurance premiums takes us one step closer to just such a world.