Insurers Raising Rates: Is Health Care Reform to Blame?

The Wall Street Journal has a story today on something that health care bloggers--at least, those who were skeptical of health care reform--have been talking about for a while now:  insurance companies are raising rates in response to the legislation.  Or, at least that's why they say they're raising rates.  Kevin Drum is skeptical:

The Wall Street Journal reports that health insurers are planning to dramatically raise premiums to pay for extra benefits required by the healthcare reform bill passed earlier this year. Is this legit? Or are insurers just using ACA as a handy excuse to jack up rates? My guess is that a couple of sentences in the Journal piece tell the story:

The rate increases largely apply to policies for individuals and small businesses and don't include people covered by a big employer or Medicare.

....Democrats front-loaded the legislation with early provisions they hoped would boost public support. Those include letting children stay on their parents' insurance policies until age 26, eliminating co-payments for preventive care and barring insurers from denying policies to children with pre-existing conditions, plus the elimination of the coverage caps. Weeks before the election, insurance companies began telling state regulators it is those very provisions that are forcing them to increase their rates.

Hmmm. Don't those provisions apply to all plans, not just individual and small-business policies? So why are insurers boosting rates only on the latter? I'm sure Aetna and Blue Cross have some extremely complicated and plausible sounding reasons for this, but I'd take them with a grain of salt.

Perhaps Kevin and I are simply both inclined to believe that the most parsimonious explanation of rate hikes is the one that fits our prior position on health care.  But there are a lot of good reasons to believe that at least some of the rate hikes reflect the new law, rather than insurers gratuitously raising rates.

As the article notes, the Democrats wanted to provide benefits they could tout during the election.  So they tucked all these fine sounding goodies into the law to take effect early.  Unfortunately, until the individual mandate kicks in (and maybe/probably even after it does), some of these provisions give people every incentive to game the system by waiting until, say, their kid gets leukemia to buy a policy.

Contra Kevin's belief, these sorts of mandates often have a disproportionate effect in the smaller markets--which is why the individual and small group markets in Massachusetts seem to be melting down.  As I understand it, that's because large employers tend to make it harder to game the system; they have opt-out rather than opt-in systems for health insurance, open enrollment periods, and more than occasionally, benefits are simply mandatory.  It may also be that in general, larger business insurance pools consist of more affluent and socioeconomically stable individuals, and are better age-balanced, meaning that they will have on average lower costs.  And of course, larger businesses absorb many of the administrative costs of running the pool; as those administrative costs rise--perhaps because it is now easier to game the system by jumping in and out of the insurance pool as you incur expenses--they will fall hardest on individuals and small businesses.

Whatever the reasons, small and individual markets bearing the heaviest increases is not new; it's exactly what we've seen in Massachusetts, where there's not much question that the cost control problem is very real.

In fact, I find it hard to fathom the depth of Kevin's skepticism.  Would rates have gone up anyway?  Quite possibly; though the recession should have had a moderating effect on price increases, it has probably also caused some of the healthiest patients to give up their insurance (while those whose costs exceed their monthly premium cling desperately to their policies).  But the skepticism that PPACA has anything at all to do with increasing prices seems very odd to me.  Did Kevin, or anyone else, really think that they could just add a bunch of new benefits for free?  Health insurance companies have relatively thin profit margins, so where, exactly, did they think the money was coming from to provide all these extra services?

If you really think that insurance price increases have nothing to do with costs, and everything to do with insurer greed, you need to explain a few anomalies.  First of all, why did insurers all suddenly get much greedier now?  And if they haven't gotten greedier, then why did they wait until the middle of a recession to impose price increases just at the time when they are most likely to cost the insurers their healthiest customers? 

Second of all, why are we seeing so many non-price reactions?  Take what's happening in Georgia, according to a certified underwriter (and, I'm gathering, vehement Obamacare opponent):

All but two health insurance companies have withdrawn from offering maternity benefits.

Only a handful of companies will still write "child only" health insurance plans.
As of this date, it is almost impossible to find a rate for children's health insurance if they are under age 19 and you are looking for coverage to be effective on 9/23/10 or later.

Some companies have either withdrawn from offering major medical business or are dropping hints they will be out of that market in 18 months or less.

Many have already indicated higher premiums for the 4th quarter of 2010 and later, especially on children under age 19.

Companies are starting to push limited benefit plans as "more affordable" alternatives to true major medical insurance.

Several companies have introduced new plans with stripped down benefits in an attempt to make their product look more appealing.

Doctor and hospital networks are shrinking in an effort to further control costs but also has the effect of limiting access to a wide range of medical providers.

Is this happening because insurers just had a mass outbreak of meanness?  Or is it because no congress, no matter how large their landslide, can repeal the laws of supply and demand?