Krugman's health insurance dishonesty 

The Obama administration has turned insurance company Wellpoint into something of a punching bag for it's decision to sharply raise rates in California. Predictably, New York Times columnist Paul Krugman picks up the ball and runs with it. Here's how the Nobel prize-winning economist explains Wellpoint's decision to raise rates:

Bear in mind that private health insurance only works if insurers can sell policies to both sick and healthy customers. If too many healthy people decide that they’d rather take their chances and remain uninsured, the risk pool deteriorates, forcing insurers to raise premiums. This, in turn, leads more healthy people to drop coverage, worsening the risk pool even further, and so on.

Now, what WellPoint claims is that it has been forced to raise premiums because of “challenging economic times”: cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.

So the rate increases, WellPoint insists, aren’t its fault: “Other individual market insurers are facing the same dynamics and are being forced to take similar actions.” Indeed, a report released Thursday by the department of Health and Human Services shows that there have been steep actual or proposed increases in rates by a number of insurers.

But here’s the thing: suppose that we posit, provisionally, that the insurers aren’t the main villains in this story. Even so, California’s death spiral makes nonsense of all the main arguments against comprehensive health reform.

In particular, Krugman goes on to dissmiss the possibility that being able to purchase insurance across state lines would solve California problems:

For example, some claim that health costs would fall dramatically if only insurance companies were allowed to sell policies across state lines. But California is already a huge market, with much more insurance competition than in other states; unfortunately, insurers compete mainly by trying to excel in the art of denying coverage to those who need it most. And competition hasn’t averted a death spiral. So why would creating a national market make things better?

What is he talking about? Even if California does have more competition than smaller states, there are still state insurance mandates that all California insurers are beholden to. Though Krugman completely ignores the problem of state regulation, the Wall Street Journal expains that's a major reason behind Wellpoint's rate increase. There are onerous regulations specific to California costing Wellpoint a great deal of money -- regulations not found in other states:

Wellpoint's rate hikes are the direct result of the Golden State's insurance regulations—the kind that Democrats want to impose on all 50 states. Under federal Cobra rules, the unemployed are allowed to keep their job-related health benefits for 18 to 36 months. California then goes further and bars Anthem from dropping these customers even after they have exhausted Cobra. California also caps what Anthem can charge these post-Cobra customers.

Most other states direct these customers to high-risk pools that are partly subsidized, but California requires the individual market to absorb the customers and their costs. Even as California insurers have had to keep insuring these typically older and sicker patients, the recession has driven many younger, healthier policy holders to drop their insurance—leaving fewer customers to fund a more expensive insurance pool.

This explains why Anthem lost $58 million in California on its post-Cobra customers in 2009. If WellPoint didn't raise premiums amid these losses, it would soon be under assault from its shareholders, if not out of business.

There may be other factors at work here, but it's preposterous for Krugman to say that Wellpoint's actions in California disproves the idea a national market for health insurance would save money.

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Mark Hemingway

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