Obama's Misleading Assault on the Insurance Industry

Despite the president's repeated attempts to defend his health reforms, ObamaCare remains deeply unpopular--in the past four months the Rasmussen poll consistently suggests 52% to 58% of Americans are opposed to it. Now President Obama is trying to change the debate by attacking insurance companies. His populist rhetoric is misleading, and his own words show he knows as much.

One of the chief complaints about health insurers is that they refuse to provide insurance to everyone at the same price, regardless of an individual's pre-existing medical conditions. On Monday, talking to a friendly town-hall audience at Arcadia University, Mr. Obama was blunt: "Every year, the problem gets worse. Every year, insurance companies deny more people coverage because they've got pre-existing conditions."

Yet President Obama himself has acknowledged more than once that insurers don't really have a choice.

State insurance regulators quickly pointed out that Mr. Obama's proposal for a federal rate authority wouldn't work and would complicate their essential task of making sure that insurance firms have sufficient funds to cover future health care costs.

In his Feb. 3 town-hall meeting in Nashua, N.H., he said: "You can't [demand] insurance companies . . . take somebody who's sick, who's got a pre-existing condition, if you don't have everybody covered, or at least almost everybody covered. And the reason, if you think about it, is simple. If you had a situation where not everybody was covered but an insurance company had to take you because you were sick, what everybody would do is they'd just wait till they got sick and then they'd go buy insurance. Right? And so the potential would be there to game the system."

In his Jan. 20 ABC News interview, Mr. Obama noted that if insurance firms accepted all applicants, premiums would skyrocket, an insurance mandate would be necessary, and massive taxpayer subsidies would follow. The president obviously knows it makes no sense to blame insurance companies for paying attention to pre-existing conditions when taking on new customers.

Mr. Obama, Health and Human Services (HHS) Secretary Kathleen Sebelius, and their Democratic allies have also hammered the insurance industry for making huge profits at the cost of patients' finances and health. Their complaints picked up especially after WellPoint subsidiary Anthem announced last month that it would raise individual insurance premiums up to 39% for some California customers.

The Democrats' attack is misplaced. Fortune 500 data show that of the 43 industries that actually made a profit in 2009, health insurance ranked 35th, with profits of only 2.2% of revenues.

More fundamentally, premium increases are driven not by profits but by costs, as WellPoint has made abundantly clear in California. When HHS issued "Insurance Companies Prosper, Families Suffer," its Feb. 18 report on firms that implemented "excessive" premium increases, plenty of nonprofit firms (such as Blue Cross/Blue Shield of Michigan, Regency Blue Cross/Blue Shield of Oregon, and Blue Cross/Blue Shield of Rhode Island) made the list.

But rather than argue over accounting data--which never show that profits amount to a significant portion of health-care costs anyway--let's listen to what the marketplace is telling us. If health insurance is so lucrative, why aren't giant companies jumping in?

MetLife has chosen to invest billions of dollars of free cash not in the health-insurance business but in a risky acquisition of the international life insurance business of beleaguered conglomerate AIG. And what about firms like Microsoft, General Electric, Google and Wal-Mart? They know how to enter new markets and make a profit. Why aren't they selling health plans?

Those who know best are persuaded that far from being easy, making money selling health insurance is tough. It is no wonder Warren Buffett told CNBC on March 1 that health insurance is one part of the vast insurance market in which he has avoided investing.

Mr. Obama's third theme is that health insurance needs more regulation. Borrowing from legislation introduced by California Sen. Dianne Feinstein (who wants for-profit insurance firms to disappear), the president's own reform plan, announced on Feb. 22, included a federal Medical Insurance Rate Authority to review insurance premiums and prevent unreasonable increases.

Federal regulation of health insurance premiums makes little sense. Most states already have the power to review and reduce premiums. It hasn't done them much good. Massachusetts, which already has the essence of ObamaCare--no restrictions on pre-existing conditions, an individual mandate, and huge taxpayer subsidies--has the highest premiums in the nation.

The Bay State has the power to cut premiums, but it hasn't figured out how to do that without cutting health care itself. Oregon has had much the same experience, as have others. State insurance regulators quickly pointed out that Mr. Obama's proposal for a federal rate authority wouldn't work and would complicate their essential task of making sure that insurance firms have sufficient funds to cover future health care costs.

A proper debate over how to deal with both the insured and the uninsured, including those with significant pre-existing medical conditions, is extremely important. It involves difficult problems of regulation, incentives and costs. The president's populist foray against health insurers is a reckless diversion from that broader debate.

He and his reform allies should explain to the public the real dilemma. Health insurers operate in a market in which party one (the patient) is told by party two (the doctor) what products and services to consume, while party three (the insurance firm) pays the bill, and more often than not, party four (the employer) bears the financial risk of cost overruns. That's a tough business environment in which to make money without offending someone.

John E. Calfee is a resident scholar at AEI.

Photo Credit: iStockphoto/DNY59

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About the Author

 

John E.
Calfee
  • Economist John E. Calfee (1941-2011) studied the pharmaceutical industry and the Food and Drug Administration (FDA), along with the economics of tobacco, tort liability, and patents. He previously worked at the Federal Trade Commission's Bureau of Economics. He had also taught marketing and consumer behavior at the business schools of the University of Maryland at College Park and Boston University. While Mr. Calfee's writings are mostly on pharmaceutical markets and FDA regulation, his academic articles and opinion pieces covered a variety of topics, from patent law and tort liability to advertising and consumer information. His books include Prices, Markets, and the Pharmaceutical Revolution (AEI Press, 2000) and Biotechnology and the Patent System (AEI Press, 2007). Mr. Calfee wrote regularly for AEI's Health Policy Outlook series. He testified before Congress and federal agencies on various topics, including alcohol advertising; biodefense vaccine research; international drug prices; and FDA oversight of drug safety.

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