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Uncle Sam's meddling in health insurance rates is wrong and will hurt consumers

The US Department of Health and Human Services is trying to bully or shame health insurers into reducing their rate increases. The problem is that the federal government has no legal authority to regulate health insurance rates and doing say may actually drive prices up.

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On May 19, the US Department of Health and Human Services (HHS) issued a final regulation requiring that, starting on Sept. 1, 2011, health insurers filing for an “unreasonable” rate increase – namely one that exceeds 10 percent – must publicly justify their proposal, so that “consumers [will] know why they are paying the rates that they are.”

The problem is that the federal government has no legal authority to regulate health insurance rates. Insurance, including health insurance, is regulated by the states. The McCarran-Ferguson Act, which preserves the principle of state regulation of insurance, was not amended by the Patient Protection and Affordable Care Act, the law under which the new rule on health insurance rates was issued. So what is going on here? With no regulatory authority at all, HHS is trying to bully or shame health insurers into reducing their rate increases. The whole effort is an incredible exercise in chutzpah.

The fact sheet put out by HHS to explain the new regulation claims that “Many times insurance companies have been able to raise rates without explaining their actions to regulators or the public or justifying their reasons for their high premiums.” In fact, in most instances, health insurers do have to justify rate increases to their state regulators, by providing actuarial data that can be reviewed by the state regulator’s actuaries.

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One can question why, in a competitive market (and health insurance is highly competitive in most parts of the country), private companies should have to justify rates at all. Health insurance is not a public utility (at least not yet, although that seems to be the direction it is headed). Auto manufacturers don’t have to justify rate increases to a government agency. Makers of washing machines don’t have to. Why insurers? Oil companies are starting to face the same kinds of questions regarding gasoline prices at the pump, even though there is no evidence that gasoline prices are not highly competitive.

Who defines an 'unreasonable' rate?

But even if we accept the need to regulate prices for insurance – and there are some good arguments for doing so, given the complex and intangible nature of the product – states do that already. Under the laws of most, if not all, states, rate increases that are not actuarially justified can be denied or rolled back. What HHS seems to be saying is that even if rate increases can be actuarially justified, insurers can not use them if they are “unreasonable.” Where does that authority come from? Who determines what is “unreasonable?” Is a 10 percent increase unreasonable per se?

Even though there is no statutory authority for the federal government to deny or roll back health insurance rates, the effort being mounted by HHS will probably work, at least in the short term. Indeed, it is already having some effect, as some state regulators are denying rate increases for being unreasonable even if they are actuarially justified. Some companies are voluntarily forgoing rate increases that they would have sought previously.

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