In an entirely uncritical, unanalytical story by Rachel E. Stassen-Berger, the Pioneer Press reported that the Minnesota State Senate voted to approve a measure that would cap health care insurance premiums in Minnesota, if signed into law. While being promoted as a measure that would lower health care insurance premium increased, this counter-intuitive measure will have exactly the opposite effect.
Trouble with the idea is this; it fails to take into account the real costs involved in the insurance business. In a free market – something America is supposed to be – premiums should fluxuate from year to year, based on premiums collected versus claims paid out. In one year, premiums might go up because claims were high; in another year, in which claims go down, so do premiums. That’s not just ivory-tower idealism; I’ve worked briefly in the insurance industry and have seen premiums that go down, not just up.
But once price caps are forced on the industry, it’s a guarantee that prices will only go up. Here’s why.
Let’s use some simplified numbers to illustrate an example. Let’s say that the increase cap is set at five percent. In a given year, let’s say that claims, advertising and employee costs for Insurance Company A go up seven percent. Hold on, though; they can only raise premiums by five percent to pay for it, putting the company behind by two percent for the year.
Now, the next year, lets say Insurance Company A’s costs go down by one percent. So rates should go down, right? Nope; the company’s still behind by two percent, so you’ll see at least a one-percent increase to rates. And that’s just a two-year example.
Consider now, if you will, a 10-year example where for the first six years, Insurance Company A’s expenses go up by an average of seven percent, and they are only allowed annual premium increases of five percent. That means the company’s premium increases are now behind by a total of 12 percent.
In the final four years, claims go way down and increase at a rate of only three percent. Think rates will go down? Wrong! Those four years will result in giving the company the ability to catch up only eight of their lost 12 percent; at best, rates would continue going up by five percent every year of that decade, with the company still losing ground.
In that scenario, it doesn’t take an HDTV with an HDMI cable to see the eventual outcome. Companies would start lowering benefits and dropping non-mandated benefits, not to mention laying off staff to help provide customer service in the claims process, making for a harder time in getting claims processed.
Larger providers would be able to absorb these costs longer than smaller insurers. Eventually, you’d see some insurers simply go out of business, especially if you toss in a couple years where claims skyrocket by 10 or more percent.
So, while it’s designed to make insurance more affordable, the net effect of the Senate’s bill is actually going to lead to constant increases, a reduction of choices, unemployment and lower benefits. Of course, liberals have never really understood business, so what can one expect?
But hey, if increase caps are the wave of the future for liberal politicians, here’s a place to start: budget increase caps on government!