Obama's Healthcare Plan -- More (Bad) Price Controls, Plus a Potential Showdown With the States

Last Updated Feb 23, 2010 9:50 AM EST

On the whole, the healthcare reform proposal that President Obama unveiled yesterday is a reasonable document that splits the difference between the stalled House and Senate bills. But one new element, price controls on health insurance, will fuel Republican complaints that the reform package represents a federal government takeover of health care. Despite the unpopularity of big premium hikes by WellPoint and other insurers, Obama should yank this provision.

Similar to a bill prepared but not yet filed by Sen. Dianne Feinstein (D-Calif.), Obama's plan would allow the federal government to block what it considers excessive rate increases by insurance companies. Specifically, the President wants to give the Secretary of Health and Human Services the authority to review price increases and either stop them or order insurers to make refunds to plan members if the rate hikes are too high.

About half of the states now require insurance carriers to submit increases in premiums for approval; the other half don't. The latter include California, where Anthem Blue Cross, a WellPoint subsidiary, announced rate rises of up to 39 percent for individual policyholders. (The increases were postponed after both the state and Congress launched investigations.) That announcement provided the impetus for Feinstein's and Obama's proposals, which are politically popular.

But there are two factors Obama isn't taking into consideration. First, while the federal government already sets the rules for the health plans of self-insured companies under the ERISA law, the states regulate other private insurance plans. So the Obama-Feinstein proposal could potentially set off a turf war between federal and state regulators. The National Association of State Legislators has already sounded off to Congress about its desire to keep the proposed health insurance exchanges under state control-an approach that Obama supports.

Second, and more worrisome, the proposal to limit premium increases by government fiat really amounts to price controls. As I noted when Massachusetts Gov. Deval Patrick suggested something similar last week, price controls never work in the long run. Inflation comes roaring back as soon as the controls are relaxed. Moreover, price caps distort the market and ignore the underlying causes of inflation. Obama's proposal itself has already elicited suggestions that the White House wants to limit insurance costs through regulation because the reform proposal has insufficient cost controls.

Like the Senate bill on which it is largely modeled, the Obama plan lacks a rigorous cost containment mechanism. Even the "Cadillac plan" excise tax that was supposed to encourage people to buy less insurance has been significantly scaled back. But if, as published reports suggest, most of the substance of the Senate bill has been retained, the legislation includes the incentives and demonstration projects that will start moving us toward serious reform of the healthcare delivery system. That is where the bulk of money is going to be saved in the long run. In the short term, however, the individual market, where most of the big rate hikes are being seen, will benefit if everyone has to buy insurance, so that the healthy can subsidize the sick.

  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.