Where's the Hundreds of Billions in Healthcare Savings? Next Up - Price Controls

In a battle of political will vs. common sense, political will won out as it usually does. The healthcare bill was supposed to save hundreds of billions of dollars but proponents of the bill, especially president Obama never explained how.

Already costs are spiraling out of control, so much so that Congress is resorting to price controls to prevent excessive rate hikes by insurers.

Please consider Senate Bill Sets a Plan to Regulate Premiums

Fearing that health insurance premiums may shoot up in the next few years, Senate Democrats laid a foundation on Tuesday for federal regulation of rates, four weeks after President Obama signed a law intended to rein in soaring health costs.

Mr. Harkin praised a bill introduced by Senator Dianne Feinstein, Democrat of California, that would give the secretary of health and human services the power to review premiums and block “any rate increase found to be unreasonable.” Under the bill, the federal government could regulate rates in states where state officials did not have “sufficient authority and capability” to do so.

Reviving the proposal on Tuesday, Mr. Harkin said: “Rate review authority is needed to protect consumers from insurance companies’ jacking up premiums simply because they can. Protections must be in place to ensure that companies do not take advantage of current market conditions before health reform fundamentally changes the way they do business in 2014.”

Grace-Marie Turner, president of the Galen Institute, a research center that advocates free-market health policies, said the Democrats’ proposal was unlikely to succeed in lowering insurance costs.

“Capping premiums without recognizing the forces that are driving up costs would be like tightening the lid on a pressure cooker while the heat is being turned up,” Mrs. Turner said.

Price-Wage Controls Never Work

Clearly Grace-Marie Turner won this debate in a first round knockout. Wage and price controls never work and Harkin never bothered to look at the reasons why costs are rising.

There was nothing in the bill that put pressure on hospitals to maintain costs, and if hospitals do not maintain costs then the insurers cannot. Moreover there was nothing in the bill to increase competition anywhere along the line.

The most likely expectation of this legislation is that it will create another bureaucratic boondoggle that will waste more money and in the end simply determine the rate increases are justified. Health care rationing is another likely possibility.

Wage and price controls have never worked anywhere. This time will be no different.

Progress or Retrogression?

Please consider Gary Becker's article The Health Care Bill: Progress or Retrogression?

The most important needed reform is an increase the fraction of total medical costs that come from out-of pocket expenses in the form of large deductibles and significant co-payments. Out-of-pocket spending accounts for only about 12% of total American spending on healthcare, whereas the share of out-of –pocket spending is over 30% in Switzerland, a country considered to have one of the better health delivery systems. Partly because of this major difference, health care takes 11% of Swiss GDP compared to the much higher American percentage. As far as I can discover, nothing in the new bill really tries to raise the out-of-pocket share, and some changes would reduce it even further. These include tax credits for individuals and families that earn up to 400% of the federal poverty level (up to about $90,000 for a family of four) that enable them to get coverage through newly created Insurance Exchanges.

Another desirable reform is to reduce the reliance of the American health system on tax-deductible employer-based insurance since tax deductibility has encouraged low deductibles and low co-payments. It has also locked workers with health problems into their current jobs since they may not qualify for insurance at other companies because of these pre-existing health conditions. The bill does propose to phase out tax deductibility for the more expensive plans by 2018, but who knows if that will ever be implemented.

For the most part, however, the bill increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient health insurance. Many companies are already beginning to add to their projected future costs the anticipated increase in the cost to them of insuring their employees. These changes will particularly affect the costs of smaller companies since they are the main ones that do not provide health insurance for their employees. Since smaller companies are responsible for a disproportionate share of additions to employment during recent years, this provision of the bill will tend to reduce the demand for workers and hourly wages.

The US health care market is over-regulated rather than under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states. Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs is a desirable protection against unexpected health care risks. The bill generally pushes in the direct of greater regulation, such as the limitations imposed on how much health insurance companies can spend on administrative costs relative to their other costs, the mandated reviews of the premiums charged by health insurance companies, and the mandated provision of health insurance by small companies.

Harkin Unfit For Congress

Harkin's "solution" will do nothing to solve the underlying issues. It gives no incentives for consumers to shop for the best deals. It gives no incentives for hospitals to reduce costs. It does nothing to promote competition between insurance companies. It does not allow bargaining with drug companies to contain prescription costs.

Instead, Harkin's solution creates more government red tape and more waste. The health care bill that Congress passed took a bad situation and made it worse, especially for small businesses, and now Harkin wants to compound the problem further yet.

I encourage Iowa voters to send Harkin packing. Neither Iowa nor the nation can afford his "solutions".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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