Massachusetts Insurers Post Big Losses


When MassCare passed, it was supposed to lower the average cost of health care by getting relatively cheap young people into the system, and ending the inefficiencies of caring for the uninsured.  Unfortunately, it hasn't quite worked out that way.  The bill for the uninsured only dropped by about 40%; the young, cheap people turned out to almost all need subsidies, and worse, some of them figured out how to game the system by buying insurance, getting a bunch of expensive procedures, and then dropping the insurance again.  There was a brief improvement in insurance prices for the individual market, because Massachusetts, with its community rating and guaranteed issue, had had a pretty sizable problem with adverse selection.  But after a few years, insurance costs were still marching briskly upward, rates were among the highest in the country, and the system was putting heavy pressure on a budget that was already strained to the limit by the recession.

The Massachusetts governor's answer to this problem was to simply deny the Massachusetts insurers the right to raise their prices.  Then, when they refused to quote prices on the exchange at the old, controlled prices, the government essentially argued that they were a bunch of whiny liars who didn't need all that extra money, and commanded them to list their insurance at the old prices.  As far as I know, they never did find an actuary to sign off on the mandated prices, but the insurers lost their hearing.

Well, now the whiny liars have upped the ante, claiming that they lost a bunch of money in the first three months of 2010, mostly thanks to the extra money they had to reserve against the losses they anticipate under the new rates.  It will be interesting to see whether we get another War on Accounting, where Deval Patrick accuses the state's biggest insurers of the dastardly use of Generally Accepted Accounting Principles in order to embarrass his awesome government program.

And indeed, it's not impossible that there's a strategic element to this; there's always discretion in how companies reserve for losses.  There is also always the possibility of accounting error.  But those possibilities are not unlimited, because financials have to be signed off on by auditors who are keenly alive to the possibility of ending up on the wrong side of a lawsuit if they wink at obviously misleading representations.  And four different companies probably didn't all make the same accounting error.

There's a depressing possibility, even a likelihood, that this is our future.  It's hard to simultaneously expand demand, while lowering the incentives for supply (i.e. Medicare reimbursements), without having some pretty dramatic mismatches between the two.  There's an old adage common in restaurants and engineering that goes "Good.  Fast. Cheap. Pick Two."  Change that middle word to "Universal" and you've got a pretty good summation of the problem that Massachusetts now faces--and that the rest of us soon will.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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