Are Obama's price controls on insurance premiums a decoy gambit?

How to fix health policy.
Feb. 22 2010 6:25 PM

A Decoy Gambit?

How badly does Obama want to impose pricing limits on health insurers?

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The central issue, of course, is defining "excessive." Are health insurers gouging prices now? The evidence is mixed. A report issued earlier this month by Health Care for America Now!, a labor-backed pro-reform coalition, showed that the nation's five largest for-profit health insurers (WellPoint, UnitedHealth, Humana, Cigna, and Aetna) saw a combined profit increase last year of 56 percent, yet provided private coverage to 2.7 million fewer people than they had the year before. But the profits weren't across the board; Aetna saw an 8 percent decline. The huge combined increase was driven mostly by Cigna, whose 356 percent increase appears to be unrelated to its core health insurance business. As for declining private coverage: Health insurers argue (not implausibly) that it's largely driven by the tendency of young, healthy people to drop nongroup health insurance in tough economic times.

Profits in the health insurance business aren't as great as many suppose. In a Sept. 25 online column for the New York Times ("How Much Money Do Insurance Companies Make? A Primer"), Princeton economist Uwe Reinhardt calculated the profit margin for WellPoint, parent company to Anthem Blue Cross (which earlier this month caught hell from the Obama administration for raising California premiums by up to 39 percent). In 2008, Reinhardt wrote, WellPoint's profit margin was 4.07 percent. In 2007 it was 5.47 percent. In 2006 it was 5.42 percent. "Relative to other industries," Reinhardt concluded, "these are not particularly high numbers." None of the big five ranks among the United States' 10 most profitable insurance companies, as ranked in 2009 by Fortune; on Fortune's list of the 53 most profitable industry sectors, health insurance ranks 35th. One expects more from an industry that enjoys so ludicrous a degree of market concentration. A 2007 study by the American Medical Association found that fully 64 percent of all metropolitan statistical areas had at least one insurer that had a market share of at least 50 percent.

The Obama administration is aware of all this, but bashing insurance companies when premiums are rising sky-high is can't-lose politics, especially considering that health insurance is the one major health-industry sector that for the past six months has actively opposed the health reform bill. It's a nice way to paper over the uncomfortable reality that the health reform bills that cleared the House and the Senate do almost nothing to control medical inflation. And it should help shore up Obama's Democratic base, which loves to imagine that health insurance profits are grotesquely huge. That's why they're so evil! Liberals seldom consider that the reason health insurers are so stingy and so untrustworthy is not that they're hugely profitable but that they aren't hugely profitable. Indeed, it's far from clear that the economic model of private for-profit health insurance is viable when we demand that health insurers behave decently. Conservatives would say that's an argument to ease up on regulation. I say it's an argument not to weep too many tears for an industry that may be going the way of the dodo. If the market can't provide decent health insurance, the government (or heavily regulated nonprofits) certainly can. But I don't think making the federal government the referee on premium increases is an especially good way to regulate private health insurance. Neither, I suspect, does President Obama.

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Threatening to do so, however, is a great way to drive Republicans crazy. Should they demand he retreat, Obama can do so and then use his bully pulpit to point out that his is the only side in this negotiation willing to make any concessions. I'm not convinced it will get a health reform bill passed. Threatening to create a government-insurance "public option" program was, at least in the minds of some Democrats, similarly a decoy (though the favored term was "bargaining chip"). Yet jettisoning it didn't win any GOP votes. But the decoy gambit isn't a bad way to put an advantageous spin on health reform's demise. I wish I thought the White House expects to achieve anything more than that.

Update, March 18: It's been removed from the bill; the Senate parliamentarian said it didn't meet the requirements of reconciliation.

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E-mail Timothy Noah at chatterbox@slate.com.

Timothy Noah is a former Slate staffer. His  book about income inequality is The Great Divergence.