The New York health insurance mess

It's interesting to behold all of the things the media is discovering now that health care reform has passed. Today's New York Times examines the impact of New York state law which, similar to ObamaCare, prohibits health insurance discrimination against those with pre-existing conditions. It has -- surprise! -- resulted in incredibly high rates and an insurance "death spiral":

New York’s insurance system has been a working laboratory for the core provision of the new federal health care law — insurance even for those who are already sick and facing huge medical bills — and an expensive lesson in unplanned consequences. Premiums for individual and small group policies have risen so high that state officials and patients’ advocates say that New York’s extensive insurance safety net for people like Ms. Welles is falling apart.

The problem stems in part from the state’s high medical costs and in part from its stringent requirements for insurance companies in the individual and small group market. In 1993, motivated by stories of suffering AIDS patients, the state became one of the first to require insurers to extend individual or small group coverage to anyone with pre-existing illnesses.

New York also became one of the few states that require insurers within each region of the state to charge the same rates for the same benefits, regardless of whether people are old or young, male or female, smokers or nonsmokers, high risk or low risk.

Healthy people, in effect, began to subsidize people who needed more health care. The healthier customers soon discovered that the high premiums were not worth it and dropped out of the plans. The pool of insured people shrank to the point where many of them had high health care needs. Without healthier people to spread the risk, their premiums skyrocketed, a phenomenon known in the trade as the “adverse selection death spiral.”

“You have a mandate that’s accessible in theory, but not in practice, because it’s too expensive,” said Mark P. Scherzer, a consumer lawyer and counsel to New Yorkers for Accessible Health Coverage, an advocacy group. “What you get left clinging to the life raft is the population that tends to have pretty high health needs.”

Since 2001, the number of people who bought comprehensive individual policies through HMOs in New York has plummeted to about 31,000 from about 128,000, according to the State Insurance Department.

At the same time, New York has the highest average annual premiums for individual policies: $6,630 for single people and $13,296 for families in mid-2009, more than double the nationwide average, according to America’s Health Insurance Plans, an industry group.

It's not difficult to imagine how this played itself out back in the early 1990s when these regulations were passed. Left-wing politicians and other self-appointed leaders of the armies of compassion argued that various people with urgent medical needs, including AIDS sufferers, were unable to purchase health insurance (about as surprising as those with burning houses unable to purchase home insurance).

The insurance companies were castigated as greedy and evil by these politicians and other paragons of virtue, and calls for everyone to be guaranteed access to health insurance soon echoed throughout the halls of power. Those with the temerity to speak up against this move, who suggested that it would perhaps actually make the situation worse off, were branded as uncaring corporate lackeys motivated by a ruthless pursuit of profits, which are bad by definition.

The road was approved, paved over with good intentions, and the march to insurance hell began.

The Times notes, however, that the state government did throw the insurance companies a bone in that they were -- wow, this is really generous of you guys -- allowed to set prices within certain profit margins. However, even that limited concession is now being threatened:

As part of the political bargain to get insurance companies to support insurance for all regardless of risk, called community rating, New York State deregulated the market, allowing insurers to charge as much as they wanted within certain profit margins. The state can require companies to retroactively refund overcharges to consumers, but it seldom does.

Now, Gov. David A. Paterson has proposed to reinstate prior approval by the state of rate increases for the small group and individual plans, as a way to reverse New York’s death spiral of healthy people fleeing the market.

...[Mark L. Wagar, the president of Empire BlueCross BlueShield] also said that New York’s medical costs, universally acknowledged as being among the highest in the country, were a factor in its high premiums. He noted that the state already regulated insurance company profit margins, allowing them to allocate no more than 25 cents of every dollar for profits and administration in small group plans and 20 cents for individual plans. The governor is proposing to lower both margins to 15 percent.

Troy Oechsner, deputy superintendent for health at the State Insurance Department, blamed the insurance companies for raising rates beyond what was necessary — by being off on their projections — thus accelerating the exodus of healthy people.

“What we saw them do is they really jacked up rates because they could,” Mr. Oechsner said.

To a large extent, insurance companies police themselves, according to Mr. Oechsner. From 2000 to 2007, insurance plans reported that they exceeded state profit allowances just 3 percent of the time, resulting in about $48 million in refunds to policyholders, Mr. Oechsner said. Yet subsequent Insurance Department investigations found that insurers should have refunded three times as much.

State profit allowances? A system where businessmen must approach state-appointed commissars for permission to make money? Is this New York or the Soviet Union? Moscow on the Hudson indeed. As Michael Moore might say, dude, where's my country?

In any case, defenders of ObamaCare argue that we shouldn't worry about the New York scenario playing out nationally because, in a blow for freedom and liberty, the federal government will avoid the death spiral by requiring all citizens to purchase health insurance:

The new federal health care law tries to avoid the death spiral by requiring everyone to have insurance and penalizing those who do not, as well as offering subsidies to low-income customers. But analysts say that provision could prove meaningless if the government does not vigorously enforce the penalties, as insurance companies fear, or if too many people decide it is cheaper to pay the penalty and opt out.

Under the federal law, those who refuse coverage will have to pay an annual penalty of $695 per person, up to $2,085 per family, or 2.5 percent of their household income, whichever is greater. The penalty will be phased in from 2014 to 2016.

“In this new marketplace that we envision, this requirement that everybody be covered, that should draw better, healthier people into the insurance pool, which should bring down rates,” said Mark Hall, a professor of law and public health at Wake Forest University. But he added, “You have to sort of take a leap of faith that that’s going to happen.”

Of course, we all know how well this system is playing out in Massachusetts.

It's all so infuriating. Health care "reform" measures based on expanded government intervention have failed everywhere they've been tried. They have failed in New York. Failed in Massachusetts. Failed in Tennessee, Maine and Oregon. Left-wing politicians are batting .000 with their various health care initiatives. And still they demand yet more power, forever promising this time will be different.

Related: Also see this piece from Steven Malanga on the New York health insurance follies.