Health Insurance Rate Hikes and Adverse Selection

I recommend reading the WSJ Health Blog entry entitled “WellPoint’s Argument for 39% Rate Hike: Adverse Selection”, by Jacob Goldstein.  This article explains how adverse selection is causing health insurance claims costs to increase substantially in the individual health insurance market in California. The adverse selection has come primarily in the form of healthy policyholders dropping coverage in the face of job losses due to the recession as the sickest individuals do all that they can do to hold onto their policies. Thus premiums on such policies are increasing (in line with increases in the underlying claims costs) by as much as 39%. This makes total sense because after all, the net effect of this “downard spiral” is that the morbidity risk of the average remaining policyholder in Wellpoint’s California health insurance risk pool has substantially worsened.  In other words, there are real economic factors behind these so-called “skyrocketing” premiums, and it is not due (as some in the Obama administration and news media suggest) to some newfound avarice on the part of various and sundry sleazebag insurance CEO’s who are “putting profits ahead of people”.

Keep in mind that since insurance is state regulated, HHS Secretary Kathleen Sebelius has no legal authority to undertake a regulatory enforcement action against private insurers.  This is why the White House is urging repeal of the health insurance industry’s exemption from the McCarran Ferguson Act of 1945 as part of its latest health care proposal (specifically, see page 3 of the proposal under the section entitled “Strengthen Oversight of Insurance Premium Increases”). Thus the administration’s current political strategy is to create a regulatory “carve-out” of the health insurance industry so that the feds can regulate health insurance premiums.  Presumably the rest of the insurance industry would, for the time being, continue to be regulated primarily at the state level, as has been the case for the past 65 years.

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