California Provides Health Care Preview

WellPoint's Anthem Blue Cross announced Saturday night that it's postponing, for a second time, a proposed increase in insurance premiums for individual policyholders in California. No doubt, the health insurer is reacting to the political ambush it sustained when it proposed this rate increases late last year, only to make itself a political fodder in the debate over health reform.

Yet costs have risen sharply to California's insurers. This owes to high provider charges. But it's also a function of regulations that lead only the sickest patients to stay in the state's individual insurance market. These are the same kinds of insurance market regulations on which the Obama health plan is constructed.

Nobody's arguing government shouldn't provide a safety net for these individuals.

California requires insurers to offer people who lose employer-based coverage new policies in the individual market. Most of the younger, healthier workers who lose their employer policies either drop coverage, or find another job. Older, sicker workers can't and remain in the insurance pool. This is called adverse risk selection. Last year, Anthem lost $58 million on these policies.

WellPoint's predicament is a preview of what's to come as the Obama health plan rolls out. If insurers can't raise premiums, then how will they offset rising costs?

Nobody's arguing government shouldn't provide a safety net for these individuals. Many states create high-risk pools to provide uninsured with coverage. Using the individual insurance market to subsidize the costs of providing continued coverage to the sickest people raises premiums, especially when the healthy ones drop out.

Which gets to the premium hikes. These kinds of insurance regulations explain why California already has among the nation's highest premiums. Similar fiscal pressures will wrack the Obama health plan. Someone has to pay.

To make up the difference in an environment where their insurance pools are growing more costly; where the ability to raise premiums is confined by politics; and the federal subsidies are constrained by budget woes--the insurance plans will turn to their policies. They will cut costs by constraining the choices patients have.

Benefits will be cut, but only to a point. The insurance plans that will be offered by 2014 inside President Obama's new state-based exchanges are subject to tight federal regulation. They need to offer a specified set of benefits, and remain actuarially equivalent to a defined amount of coverage. In other words, they have limited ability to hold down costs by holding down on medical utilization.

That leaves the last lever--networks. In an environment of rising costs, with tight regulation of benefits, plans will hold down costs by keeping their provider networks narrow--contracting with the smallest number of the low cost doctors and hospitals. It goes without saying; these may not be the doctors patients want to see. But it's the one arrow left in the quiver that isn't subject to direct regulation.

We have a model for what it looks like when health plans hold down costs by contracting with those providers willing to take below-market rates.

It's called Medicaid managed care.

Scott Gottlieb, M.D., is a resident fellow at AEI.

Photo Credit: Tom Grill/Corbis

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