Tuesday, April 26, 2011

They Got It Right This Time

I've knocked the "center left" editorial board of the Los Angeles Times for their editorials which don't quite hit the mark, usually because of the timidity of the board when it comes to revealing the truth. Not this time, however. This editorial nailed it, both in terms of analysis and conclusions.

The subject is health insurance premiums and the lack of authority to regulate them by any state agency in California, including the Insurance Commission. The state can regulate car insurance and homeowner's insurance rates, but health care insurance companies have gotten away scott free for all these years. Now, under the new federal healthcare law, the health insurers have a greatly enlarged pool of potential customers, and it's time to give the state's Insurance Commissioner the power to make sure insurers aren't going to gouge their customers.

The insurers, however, don't like the idea. They point to the continued rise in health care costs and to another provision of the new federal law, the one that mandates that 80% of premiums must be spent on actual health care provision. The editorial addresses both issues.

The fundamental problem with the current system, though, is that insurers and healthcare providers have a shared incentive to raise premiums. Providers want insurers to pay more to offset stingy Medicare and Medicaid reimbursements. And the new federal caps on overhead mean that the easiest way for insurers to increase revenue is to promise more to doctors and hospitals,which would justify proportionally higher administrative expenses and profits.

That is the whole point. In order to get costs under control there has to be some kind of mechanism which provides both insurers and providers with an incentive to hold costs down. Given the new captive market for insurers (and, by extension, providers), the power to regulate premium hikes is essential. As the editorial points out, it worked for the auto insurance industry, one of the healthiest and most competitive markets in the state.

A bill has been introduced the California legislature which would give the state regulatory agencies that power, and it's a bill that has fallen short in the past. This time it needs to make it through the process.

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