Investment Info

This February, the Department of Health and Human Resources has issued a report identifying an alarming trend for insurance companies to seek premium rate increases. This is not limited to one or two states. This is not limited to one or two percentage increases in the rates. This is all the leading insurance companies asking for the right to significantly higher premiums: in Michigan hikes of 56%, in California hikes of 39%, and so on. If this only affected small numbers of policyholders, it might have passed unnoticed. But, with millions of policyholders affected across the country, these rate increase requests have attracted the full scrutiny of the federal government. Secretary Sibelius has been leading the attack, using the requests to push the reform agenda forward.

Because of the national anger, some companies have paused. WellPoint had proposed the increases take effect from March 1. Any increases, even if approved by the states, will now be delayed until May at the earliest. This decision is partly in response to the summons of WellPoint’s chief executive officer to Washington to justify the requested increases. Insurance companies find themselves in a difficult political situation. Their management teams accept a duty to maximize profits for the benefit of the stockholders. They look around at an America seriously affected by the recession. Increasing numbers of people are unable to afford the premiums, some because of unemployment, others because of a squeeze on credit. More worrying from the insurance industry is that more healthy people are deciding not to insure at all. This means the group of people left holding policies has a higher percentage of those with existing health problems. Without more healthy people in the group paying premiums and not claiming, it becomes more expensive to insure those less healthy people who remain. It is also a verified fact that hospitals and healthcare service professionals have also been increasing their fees and charges. The pharmaceutical companies have increased the price of almost all the most commonly used drugs. The insurance industry is under pressure from both sides. As Secretary Sibelius points out, however, this is not a completely accurate picture. Every year, insurance companies are required to submit reports to all the US states in which they are licensed to sell policies. This data shows many companies actually increased the number of policyholders during 2009. Read the rest of this entry »

The US is justly proud of its reputation as the home of capitalism and has promoted the idea of free markets to countries around the world. The fact that a bubble in the property market fuelled this recession does not change the philosophical power of the US economic model. When it works properly, the free market pushes businesses to compete. This improves the quality of service and keeps down the price. The consumer benefits. All federal government need do is intervene when there is clear evidence of a company abusing its dominant position to damage the consumers’ interests. Unfortunately, under the last administration, antitrust enforcement was scaled back. Worse, there were deeply entrenched monopolies and cartels that could not be investigated or regulated. The leading example of this immunity is enjoyed by the insurance industry. Some sixty-five years ago, it was exempted from federal antitrust laws by the McCarran-Ferguson Act. This is a sad example of corruption in government. Vested interests bought enough votes to get the Act passed. Lobbyists’ money has kept the immunity in place ever since.

Why is this immunity as bad thing? Competition improves choice. Given a reasonable number of companies competing in the same market, each must offer features to distinguish their product from the others. Once consumers see one product is better, they will transfer their business. The competitors must therefore match or improve on those features to win back market share. If there’s no effective competition, an artificially small number of products will be offered. The companies will agree not to compete on quality and price which rigs the market and divides it up between the suppliers. In the insurance market, patients have been paying artificially high prices. Doctors have also been paying inflated prices for their medical malpractice insurance. At a time when the costs of healthcare and drugs have been rising faster than inflation, this is penalizing the US consumer and the taxpayer who often ends up subsidising payment of these inflated prices. There is no justification for retaining this immunity. Read the rest of this entry »