Price Controls and Romneycare

Imagine a marketplace where you have to receive government approval for setting prices on your product, where you have to show your math for every decision made, and where you are “granted” the ability to increase the cost of your product only after first being approved by government bureaucrats.

Well, it’s a reality today.

This morning AEI’s Jim Pethokoukis links an interesting Health Affairs study which I’ve been looking at the past day or so – it’s an overview of the outcomes to expect from Obamacare based on the experience in Massachusetts. Noting that Mitt Romney’s health care law “provided the template for the Affordable Care Act, so the state’s experience under that legislation provides an example of the potential gains under federal health reform”, the piece goes on to warn against the problem of health care cost increases the Bay State has experienced being replicated on the national level:

There is, however, reason to be concerned about employer-sponsored insurance premiums because health care costs in the state continue to rise. Data from the Insurance Component of the Medical Expenditure Panel Survey, a national survey of employers, indicate that in 2006 the average employee contribution toward premiums in Massachusetts was $1,011 for single coverage and $3,128 for family coverage. By 2010, the average employee contribution had increased to $1,200 for single coverage and $3,444 for family coverage, although the change in the employee contribution for family coverage was not statistically significant. Health care costs in Massachusetts, as in the rest of the country, continue to grow faster than wages and inflation. …  Consistent with that finding, Massachusetts continues to struggle with escalating health care costs, reflecting the decision to defer addressing costs in the 2006 legislation so as not to hold up the expansion in coverage.

As Pethokoukis notes, “The authors conclude that based on the Romneycare experience, Obamacare will improve coverage and not kill employer-based insurance, but containing costs will be a ‘considerable challenge.’” But I’d suggest he’s missing the next step which Massachusetts has taken, and which we will likely take as a nation as well: the imposition of far stricter bureaucratic price controls.

Sally Pipes of the Pacific Research Institute covered this a bit in the Washington Post last year. But as it happens, today has news from Massachusetts insurers on this point – who are now able to realize “no profit margin” with the 2.3 percent rate hike Gov. Deval Patrick allows.

The insurers said they requested the unusually low rate hikes this year because of public and regulatory pressure, adding that they will barely break even with the small premium increases unless demand for care remains low. Others said they could lose money with the new rates, according to EmaxHealth.

“We’re trying to be as responsive as we can to our small-business customers, and responsive to the environment,” Jay McQuaide, senior vice president for Blue Cross Blue Shield of Massachusetts, told the Globe. “There is no profit margin in these rates.”

…This year, Blue Cross was granted a 1.9 percent increase, Harvard Pilgrim Health Care can charge 3.8 percent more, Tufts Health Plan was awarded a 1.2 percent hike, and Fallon Community Health Plan can raise its premiums by 2.7 percent.

There’s a great line from Cato’s Doug Bandow about this: “Deval Patrick responded like King Canute: he insisted that premiums not rise.” But this is what future presidents will be reduced to under Obama’s law: insisting premiums not respond to the pressures of government.

At the federal level, currently Sebelius only has the power to “shame” insurers for price increases. The newly created Obamacare health insurance exchanges, however, can exclude insurers who display “pattern or practice” of “unreasonable” hikes.

The problem, of course, is that these hikes are the inevitable result of the mandate + subsidy + Medicaid expansion approach. The price controls inevitably make it impossible for insurers to have a workable business model. Already pinched, they’re driven out of marketplace. So the private market shrinks, the subsidy costs rise, and the number of people surviving on redistributive taxes explodes.

In this case, the shame game is insufficient. Washington can’t fight math. In fact, Sebelius is already being defied by insurers. The endgame of all of this is for Washington, which already dictates prices and service availability via the massive Medicare and Medicaid system, to seize the power to just set insurance prices at whim – transforming the system permanently into one of public utility, and ending any hopes of a private marketplace revival.

A final note: What should be more disturbing in the context of the 2012 election is that Romney himself is unwilling to ever specify what he would do differently about law, defending it instead as something that was right for Massachusetts. But the heart of Romney’s law, like Obama’s, is redistribution and (as an inevitable consequence) government price controls – taxing others (including non-Massachusetts residents) to expand Medicaid and create a new entitlement. And the consequences at the national level are likely to resemble closely the consequences experienced under his law: a decrease in the uninsured, an increase in the costs of subsidies and premiums, and an inevitable clampdown via government price controls.

Update: Peter Suderman has more on this at Reason. He suggests the real takeaway is that Obamacare’s best case scenario is Romneycare.

  1. DrewInWisconsin
    Ben Domenech: The problem, of course, is that these hikes are the inevitable result of the mandate + subsidy + Medicaid expansion approach. The price controls inevitably make it impossible for insurers to have a workable business model.

    That’s a feature, not a bug.

  2. Ben Domenech
    C
    DrewInWisconsin

    Ben Domenech: The problem, of course, is that these hikes are the inevitable result of the mandate + subsidy + Medicaid expansion approach. The price controls inevitably make it impossible for insurers to have a workable business model.

    That’s a feature, not a bug. · 2 minutes ago

    Indeed, you are correct.

  3. DrewInWisconsin

    Also, the number of references to Romneycare as a basis for implementing this in Obamacare strikes me as a preview of the arguments the President’s campaign will make, if we end up with Romney as the nominee. Of course, to me, Romneycare is the chief reason we should not have Romney as the nominee, but today I feel like the last Newt-supporter standing.

  4. Michael Tee

    All that eyeshade stuff is great, but this legislation fundamentally transforms the relationship between State and Citizen. After ObamaCare, you are no longer a free man in any sense of the word. Your body and its constituent parts simply belongs to the government, and the government decides when and where it will be treated, if at all.  Socialized health care rips apart the concept of individual liberty, plain and simple.  That might be fine for a democratic socialist soft tyranny in Europe, but in principle it’s very un-American at its heart.

  5. Paul A. Rahe
    C

    To think that, in selecting a standard-bearer for the 2012 election, we have to choose between the proud father of the Massachusetts monstrosity and a long-time (now outwardly regretful) cheerleader for the individual mandate! It makes one weep.

  6. Nobody

    Oh, this whole thing is so full of bugs I guess we’ll just have to go to a single-payer system.

    We really tried to avoid it….

  7. DrewInWisconsin
    Paul A. Rahe: To think that, in selecting a standard-bearer for the 2012 election, we have to choose between the proud father of the Massachusetts monstrosity and a long-time (now outwardly regretful) cheerleader for the individual mandate! It makes one weep. · 2 minutes ago

    But one of those two is “now outwardly regretful.” The other, not so much. Not at all, in fact. And he actually calls it “Romneycare” himself.

    The choice is clear to me. But maybe that’s just the final glimmer of hope I hold to before all light is extinguished.

  8. Pseudodionysius

    My browser window is showing a sale at Walgreen’s on anti-depressants.

  9. GadgetGal

    It has been clear to economists for decades that the single most effective way to control health care costs is to eliminate the tax break for employer-provided health care. According to one careful study by Charles Phelps, professor emeritus of community and preventative health at the University of Rochester this single reform could reduce health care costs by 40% with essentially no effect on health care outcomes.  The Indiana HSA plan promoted by Govenor Daniels has provided (admittedly imperfect) evidence that market based reforms can work to improve access and slow/contain cost growth.

    http://www.fool.com/investing/general/2010/08/03/the-balancing-act-health-care-and-the-economy.aspx

    Indeed, I believe such reforms are at the heart of Paul Ryan’s health care proposals.  So why are we not lauding them?  Oh yeah, I forgot–that’s “right-wing social engineering.”

  10. DocJay

    Love it.

    EasternShoreGirl: It has been clear to economists for decades that the single most effective way to control health care costs is to eliminate the tax break for employer-provided health care. According to one careful study by Charles Phelps, professor emeritus of community and preventative health at the University of Rochester this single reform could reduce health care costs by 40% with essentially no effect on health care outcomes.  The Indiana HSA plan promoted by Govenor Daniels has provided (admittedly imperfect) evidence that market based reforms can work to improve access and slow/contain cost growth.

    http://www.fool.com/investing/general/2010/08/03/the-balancing-act-health-care-and-the-economy.aspx

    Indeed, I believe such reforms are at the heart of Paul Ryan’s health care proposals.  So why are we not lauding them?  Oh yeah, I forgot–that’s “right-wing social engineering.” · 16 minutes ago

  11. Southern Pessimist

    Call me a pessimist, but many of the worst features of Obamacare will not disappear with repeal. Even with a shift away from employer based insurance and to health savings accounts healthcare delivery is going to become increasingly bureaucratic. Physicians are increasingly becoming salaried employees of huge hospital systems. These systems have their advantages but personal and personable care are not necessarily among them. They restrict competition which raises overall cost. The consierge physician will be the foremost option for those of us who can afford that service.

  12. jpark

    Paul Rahe beat me to it earlier this week:  Obamacare delenda est! 

  13. Dan Hanson

    You can already see the effect of price controls on medication:  the government has capped the rate of increase of prescription prices, and as a result there are now widespread shortages of certain low-margin drugs.

  14. Paul A. Rahe
    C
    DrewInWisconsin

    Paul A. Rahe: To think that, in selecting a standard-bearer for the 2012 election, we have to choose between the proud father of the Massachusetts monstrosity and a long-time (now outwardly regretful) cheerleader for the individual mandate! It makes one weep. · 2 minutes ago

    But one of those two is “now outwardly regretful.” The other, not so much. Not at all, in fact. And he actually calls it “Romneycare” himself.

    The choice is clear to me. But maybe that’s just the final glimmer of hope I hold to before all light is extinguished. · 5 hours ago

    Edited 5 hours ago

    Were there not other considerations I would agree with you entirely. The more I learn about Gingrich, however, the more I am persuaded that much of the time he is entirely out of control. In the beginning, I thought his candidacy clownish. In the middle, I though that I should perhaps rethink. In the end, having rethought, I think his candidacy clownish.

    The sad truth is that there is only one half-way plausible candidate in the race for the Republican nomination, and — God help us! — his achievement was the inspiration for Obamacare.

  15. DocJay
    Half of the harm that is done in this world is due to people who want to feel important. They don’t mean to do harm. But the harm does not interest them. T. S. Eliot
  16. Mendel
    Southern Pessimist: Call me a pessimist, but many of the worst features of Obamacare will not disappear with repeal. Even with a shift away from employer based insurance and to health savings accounts healthcare delivery is going to become increasingly bureaucratic. Physicians are increasingly becoming salaried employees of huge hospital systems. These systems have their advantages but personal and personable care are not necessarily among them. They restrict competition which raises overall cost. The consierge physician will be the foremost option for those of us who can afford that service.

    Agreed, but isn’t some of this not just inevitable but also desirable?

    Walmart is a huge corporation which restricts competition (by undercutting their competitors on price), is overcrowded and often not customer-friendly.  But it allows many people to purchase products they otherwise couldn’t afford, and the massive scale and top-down coordination allow operating costs to be held lower than anywhere else.  I imagine there will be many parallels when medicine becomes more of a retail shopping experience.

  17. James Gawron
    Paul A. Rahe: To think that, in selecting a standard-bearer for the 2012 election, we have to choose between the proud father of the Massachusetts monstrosity and a long-time (now outwardly regretful) cheerleader for the individual mandate! It makes one weep. · 9 hours ago

    It’s worse then that.  Even with Dr. Epstein’s surgical strike on the mandate, we must rely on Justice Kennedy’s integrity to win 5 to 4.

    Kennedy has a spine but apparently it is made out of rubber.  He doesn’t just bend in the wind. He falls over in a light breeze.

    We had better start to sing a chorus of hard conservative melodies so that Kennedy can figure he is on the winning team.  I’m not accusing him of triangulating.  I just think he is like a swiss banker.  He’d rather not know if it’s Marlene Dietrich’s $5,000,000 or Adolf Hitler’s.  After all, he has a lot of respect for other people’s privacy and he just wants everyone to “get along”.  Nothing wrong with that.

    Pardon me while I puke!!!

  18. Southern Pessimist

    Mendal, I would suggest that the economy of scale involved in ACOs do more to thwart inovation and competition than the the big box stores such as Walmart because the markets are quite different. But we shall see. Certainly the most important factor is that the patient needs to be in control of the power of the purse, not government.

  19. ‘Imagine a marketplace where you have to receive government approval for setting prices on your product,’ Off the healthcare topic, but in fact manufacturers can’t set selling prices. I’m not against this overall as it works best when the vendor has control, but there is a difference between one company setting THEIR price and colluding with other companies to set ALL prices. MAP, Minimal Advertised Pricing, has so far been upheld. In other words we can (unless you’re sued) set advertised pricing but can’t tell vendors what to actually sell things for. I am adding that our dealers ask us do this all of time and we refuse. Recently (yesterday) we had to make a decision: the dealer had retail pricing on the units (which is our MAP-you can say ‘Call For Quote’), but as soon as you put it in the shopping cart an extremely discounted price showed up. You can go out of carts, before the purchase, so we came down on the opinion it was violating our MAP- it was a form of advertising. Would this hold up in court? Who cares- you can’t live your life in fear.
  20. Western Chauvinist
    ...today has news from Massachusetts insurers on this point – who are now able to realize “no profit margin” with the 2.3 percent rate hike Gov. Deval Patrick allows.

    Great! When insurers start losing billions/year under Obamacare, we can just slap an HHS seal of approval on them and call it government.

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