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Health insurance price caps a bad idea for business

Tarren Bragdon
Albany Business Review
March 31, 2006

In the face of high and rising health insurance premiums in New York, pressure seems to be growing in some quarters for a return to the empty promise of state-enforced health insurance price controls.

The state Assembly has already passed a bill that would require the Insurance Department to approve all annual rate increases over 5 percent. Now state Insurance Superintendent Howard Mills is joining the pro-control chorus with his own proposal to require approval of increases over 10 percent.

Government controls not the answer

As they grapple with rising insurance costs, businessowners may be understandably tempted to think Mills and the Assembly are on to something. But as participants in a free market, businesspeople should know that government price controls simply don't work—in health care or any other industry. Moreover, New York's own experience demonstrates the fallacy of the argument for more regulation of the health insurance market.

Mills says insurance carriers "should be required to justify their rate increases before those rates can be passed on to the consumer." But New York law already requires such justification. Under a system known as "file and use," health insurers are free to set their own rates without state approval as long as they demonstrate that a minimum portion of premiums for individual and small group policies will be used to pay for medical benefits, such as hospital care, physician visits and prescription drugs. This minimum, known as a medical loss ratio, is set at 80 percent of premiums for the individual market and 75 percent for small groups (2-50 employees). Insurers falling below these thresholds need Insurance Department approval for rate hikes.

The medical loss ratio leaves insurers with a maximum of 20-25 percent of premiums for all marketing costs, taxes, government requirements, administrative costs and profits. It also ties New York health premiums to underlying trends within the health care system.

Before Gov. George Pataki took office, New York state's insurance superintendent approved all initial premium rates and subsequent rate modifications before they became effective. But in 1995, Pataki and the Legislature agreed to institute the "file and use" process as a way to make health insurance markets more competitive and premiums more actuarially sound and objectively based. To provide a smooth transition to actuarially based rates, the minimum medical loss ratio was linked initially to a 10 percent cap on rate increases. The Legislature did not extend the 10 percent cap after it expired in 2000.

New York's small businesses heavily burdened

In proclaiming the need to return to pre-2000 premium rate regulation, Mills is seeking to roll back reforms championed by his boss. But the superintendent's reasoning ignores what has happened since "file and use" became the regulatory standard six years ago.

From 1996 to 2000, under premium price controls, New York small businesses paid on average 15 to 22 percent more for health coverage than the national average for small businesses. But, during the latest three years (2001-2003) under the "file and use" standard, that competitive gap shrunk to between 7 and 13 percent. Large, self-insured New York companies, which are not state regulated, now pay insurance rates at the national average.

Setting arbitrary caps on rate increases—such as Mills' 10 percent proposal—would encourage insurers to file rate increases close to or at the cap, regardless of actual medical trends, rather than face the politically charged rate approval process. In fact, one recent study noted that this is exactly what happened as New York's "file and use" was being phased in from 1996 to 2000, when the arbitrary 10 percent cap was in place.

More options, not regulations, needed

Rate regulation allows state officials to put the onus on insurance companies while avoiding any analysis of how the state's intervention in the health care market has led to higher premiums. The 1993 imposition of "community rating" and "guaranteed issue" on New York's insurance market clearly is a key factor in the high cost of health insurance. Compounding the problem, New York collects over $2.1 billion in taxes and assessments from private health plans annually—driving up premium costs, pure and simple. The state also imposes 43 mandates forcing insurers to only offer more-expensive plans that cover particular benefits. This is among the highest burdens imposed by any state, and well above the national average.

New York small businesses and their employees need access to a greater variety of more flexible, affordable health insurance plans. More stringent regulations and price controls are the very opposite.

Tarren Bragdon is a health policy analyst for the Empire Center for New York State Policy. This article originally appeared in The Business Review on March 24, 2006.

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