The insurance companies are once again under fire thanks to the enormous 39% rate hike announced by Wellpoint (specifically its subsidiary Anthem Blue Cross of California). As a report from the Department of Health and Human Services notes, this is not necessarily a one-of-a-kind event. Similar and sometimes even bigger increases have recently been implemented in Connecticut (24%), Maine (18.5%), Michigan (56%), Oregon (20%), Rhode Island (16%), and Washington State (up to 40%).

A premium increase alone is not inherently a bad thing. The first question we must ask is why premiums went up so rapidly. This is where it gets interesting, because the insurers themselves have provided a justification, saying "Premium increases are necessary because health care costs are rising so much." It's like they have no choice but to pass on these rising costs in order to break even. I don't think people would demonize them for that. The problem is, they've not just held their own amid rising costs--they've seen enormous gains in profits--even as the rest of the country suffered from a deep and prolonged recession. It would seem that price gouging activity is undeniable and the American people are being exploited by the insurers.

Given that's the case, the second question is what permits this activity to occur? The answer is simple--an unregulated and non-competitive market for health insurance. Now, before you go disagreeing with me on that point, you should know that pretty much everybody is in agreement on this point--regardless of their political leanings. We need more competition in insurance markets so that consumers can make choices that will force insurers to be more accountable and that will simultaneously limit their ability to raise prices in pursuit of blind profit.

The political difference lies in how each party proposes we ought to increase competition in the insurance market. On the right, the idea is to allow the sale of insurance products across state lines. On the left, it's to set federal--rather than state--level regulations on insurers. In the Republican version, there will be a "race to the bottom" as insurers all flock to the state that offers them the most lenient set of state laws and regulations with which to comply. It's happened before with different industries and would happen again. Ezra Klein sums up both approaches nicely. I'll leave you with his comments:

Insurance is currently regulated by states. California, for instance, says all insurers have to cover treatments for lead poisoning, while other states let insurers decide whether to cover lead poisoning, and leaves lead poisoning coverage -- or its absence -- as a surprise for customers who find that they have lead poisoning. Here's a list (pdf) of which states mandate which treatments.

The result of this is that an Alabama plan can't be sold in, say, Oregon, because the Alabama plan doesn't conform to Oregon's regulations. A lot of liberals want that to change: It makes more sense, they say, for insurance to be regulated by the federal government. That way the product is standard across all the states.

Conservatives want the opposite: They want insurers to be able to cluster in one state, follow that state's regulations and sell the product to everyone in the country. In practice, that means we will have a single national insurance standard. But that standard will be decided by South Dakota. Or, if South Dakota doesn't give the insurers the freedom they want, it'll be decided by Wyoming. Or whoever.

This is exactly what happened in the credit card industry, which is regulated in accordance with conservative wishes. In 1980, Bill Janklow, the governor of South Dakota, made a deal with Citibank: If Citibank would move its credit card business to South Dakota, the governor would literally let Citibank write South Dakota's credit card regulations. You can read Janklow's recollections of the pact here.

Citibank wrote an absurdly pro-credit card law, the legislature passed it, and soon all the credit card companies were heading to South Dakota. And that's exactly what would happen with health-care insurance. The industry would put its money into buying the legislature of a small, conservative, economically depressed state. The deal would be simple: Let us write the regulations and we'll bring thousands of jobs and lots of tax dollars to you. Someone will take it. The result will be an uncommonly tiny legislature in an uncommonly small state that answers to an uncommonly conservative electorate that will decide what insurance will look like for the rest of the nation.

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Follow D. Brad Wright on Twitter: www.twitter.com/bradwrightphd

Doctoral candidate in the department of health policy and management at the University of North Carolina

Posted: March 4, 2010 12:32 AM