Price Controls in Health Care Bill

The Open Congress Blog reports on a provision of the House health reform that hasn't received much coverage.  It requires that insurers to return a portion of premiums to customers when claims are below a certain level.  A level, by the way, specified by the Secretary of Health & Human Services.

Once the bill is enacted, all health insurance plans would be required to spend at least 85 cents of every dollar paid in premiums each year to providing actual health care. If, in a given year, an insurer doesn’t spend that amount on health care, they would have to give their extra profit back to their customers in the form of rebates. Only 15 percent of premiums max could be used for marketing, administration, underwriting and profit. And the HHS Secretary could up the ratio from 85-15 if she saw fit.

The provision “almost totally strips the ability of insurance companies to combine cherry picking and premium increases to continue the huge profits they garner today,” writes Webb at the Angry Bear blog. “In a word this [section] automatically limits profits by establishing indirect price controls,” he adds.

It might make one feel good at night to think that price controls limit the profits of evil insurance companies, but that is not all price controls do - they cause shortages.

Open Congress goes on to report there is some confusion about the measure since it currently appears to phase out, just as most of the reforms get started.  It's not clear if this is intentional or an oversight at this point.

Either way, Tyler Cowen reminds us this morning:

The laws of economics have not been repealed.  I know fully well how hard it is politically, but until the supply side (and I mean the supply of services, not health insurance) is more competitive, the proposed reforms will make the core problems of U.S. health care worse not better.

Despite the Democrats nearly relentless chant of choice and competition, there is little in any of the current reforms that actually improve the status quo in these areas.