Thursday, June 22, 2006

Price Controls

Time is running out for the Senate to act on a key bill to protect small businesses from another year of double-digit health insurance premium increases.

Currently, health insurance rates for small businesses are unregulated. Until 2000, all rate increases of more than 10 percent were subject to prior approval by the Insurance Department, and regulators used this oversight authority on many occasions to reduce and even reject some increases outright as unwarranted

Price controls simply don’t work.

They never have. They never will.

When a carrier is constrained by law from increasing rates to a level that will profitably support the risk several things happen.

Benefits are reduced either explicitly or implicitly. Explicit reductions occur when the policy is restructured in such a way as to remove benefits that are high cost items. Implicit reductions occur when pre and post-sale underwriting and claim review intensifies. Implicit reductions lead to fewer policies being sold, and more policies and claims rejected post-sale.

Another way to deal with price controls on renewals is to increase new business rates. When this happens the healthier risks are priced out of the market along with the poor risks.

Carriers can also simply withdraw from the market. Either they leave the state entirely or stop writing the lines of business that are no longer profitable due to government constraints.

When the government interferes with market forces the overall result is fewer choices and higher prices.
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