If you or I were to start a business selling coffee, we would set prices that followed classic economic rules – as high as possible to increase profits but not so high as to hurt sales. We would keep an eye on competitor prices and worry that customers might not want our coffee or worse, that an economic slump would force people to make their own coffee. A lot of people think that health plans follow these rules. They don’t.

Let’s start with the basics. If Starbucks and Tully’s agreed to share price and cost information to reduce the risk of underpricing and stabilize profits, both of them would face criminal and civil penalties for violating state and federal antitrust laws. But, when insurance companies share price and cost information to stabilize insurance market prices, it’s legal. Over six decades ago, Congress exempted the “business of insurance” from federal antitrust law.

In 1945, Congress adopted the McCarran-Ferguson Act to preserve state regulation of insurance and the ability of insurers to share price and cost data. The Act was in response to a Supreme Court case that said federal antitrust law applied to insurers. In an era before computers and FedEx, people worried about data collection and analysis and the potential for bankrupt insurers resulting from faulty pricing. (Hmmm…that didn’t help AIG.) BUT, the exemption from these federal laws don’t apply if the state fails to regulate.

Naturally, states adopted rules to regulate insurance prices to preserve states’ right to govern insurers and to prevent insurer liability under federal antitrust laws. I’ll leave to another time a discussion of how well this turned out or whether 50 different states should be regulating national insurance markets or whether the insurance industry still needs antitrust protection. For now, it’s the law.

So, here is a stubborn fact for armchair economists – health insurance prices in Washington State are governed by law. Health insurers cannot just pick a price and go with it. Why not? If the price is too low, the company will go bankrupt and consumers, doctors, and hospitals will not get paid. The whole point of insurance is to collect enough money now to pay for future health care without knowing for sure what the price of care will be or the kind of care people will need.

On the other hand, if the price is too high, people can’t afford health insurance and the money that could be spent on health care gets spent on executive bonuses. Insurance regulators want health insurers to stick around, to be stable, to be like Goldilocks – not too hot, not too cold – not too cheap, not too expensive.

In Washington, the basic standard for insurance prices is this: “Premium rates for insurance shall not be excessive, inadequate, or unfairly discriminatory.” (RCW 48.19.020 first adopted in 1947.) That last part, “unfairly discriminatory” means that insurance companies have to prove that a price difference is related to risk and is not based upon an illegal factor such as race or in some cases, sex. Different price rules apply to different types of insurance companies and health plans.

For example, insurers must give the Commissioner 60 days to review the new prices of individual health insurance plans before the company can charge the new price. But, the Commissioner might reject the new price because the price exceeds legal limits. (Here’s one of the newer state laws.) Group health plans face a variety of different pricing rules. (Here’s some complicated regulatory formulas for group health plans sold by certain types of “carriers”.)

OK, so now you are bored. Here’s the point. Health insurance companies in Washington State have never been able to set prices for coverage the way Starbuck’s sets prices for coffee. (We’ve never had death panels either.) In the history of Washington health insurance, companies have gone broke, been forced to merge, or left the state because of price and profit. The ravages of health care inflation and the vagaries of predicting risk have left a handful of insurance companies with large market shares.

Now after 65 years of state regulation of health insurance rates, we add federal regulation of health plan rates. In some states where rate regulation has been weak, the new federal health care reform law will be an improvement. For states like Washington where denying rate increases has been a political tradition (the Commissioner is elected), the federal reforms will have less of an impact.

But before you go all soft and cry for the poor health insurance companies, remember why we insist on fair and strong regulation – the market rules that apply to a regular business don’t apply to the “business of insurance.” It’s a whole different world. Oh and by the way, let’s remember that the companies “negotiate” the prices they will pay your doctor for your care. We’ll tackle that another time.

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