In preparation for the Health Care Summit, President Obama unveiled his first official health care proposal. It is intended to reconcile the differences between the  highly unpopular House and Senate bills. Curiously, President Obama’s latest iteration of the liberal health policy agenda includes more federal power: the power to control “private” health plan premiums.

Price Controls. According to the President’s proposal, a new “Health Insurance Rate Authority” would oversee rate review for private insurers, so that “if a rate increase is unreasonable and unjustified, health insurers must lower premiums, provide rebates, or take other actions to make premiums affordable.”  On the face of it, this means price controls on health insurance.

The President knows the unhappy history of price controls, and the genuine misery- shortages, mainly- that such a policy guarantees. Think of the  long, hot gasoline lines of the 1970s, courtesy of the Carter Administration.

Getting it Wrong. The underlying assumption – a big one- is that federal officials will set the right premium price. Not likely.  If they don’t, we pay too much for insurance. Or, we don’t pay enough to cover the real insurance costs. In the meantime, whether insurance premiums are “unreasonable” or “unjustified” would reflect the reigning mental or political impulses that drive federal officials.

Health insurance industry profits are marginal, between two and three percent. But much of the rationale for creating this federal power is rooted in the recent premium increases in plans offered by Anthem Blue Cross in California.  Secretary of Health and Human Services (HHS) Kathleen Sebelius asked Anthem to justify the increases, which experts attribute to increases in provider rates, new state mandated benefits, and the current economic climate. The recession has encouraged younger and healthier people to drop coverage, leaving sicker and more costly persons in insurance risk pools.  Under such circumstances, insurers have little choice but to increase premiums if they wish to stay in business and pay claims.

No Happy Ending. But price controls on premium rates would make sure that there is no happy ending to this movie. Either the insurers will comply with the government controls and crack down on physician and hospital reimbursement for medical services, making those services less available, ie. Rationing. Big cost to patients. Or, insurers, running deficits, will do what the automakers and the bankers have done who are “Too Big To Fail” and run to Congress and get their a bail-out. Big cost to taxpayers.

Heritage’s Ed Haislmaier further lays out the shortcomings of price controls in health care: “Price controls would not work in health care because they attack the symptoms of runaway costs, not the cause. Medical costs today are soaring because consumers are largely insulated from them…and because the tax system discourages consumers from seeking good value for money in health care”.

Because price controls do not attack the root of increased health care spending, they would be more likely to exacerbate the problem than to fix it.  Haislmaier lists the unintended consequences of price controls: shortages of goods, reduction in the quality of goods, and diversion of economic activity and investments.  Furthermore, price controls can result in queuing, rations, and bribes as a way to allocate services, since inflexible pricing cannot address the normal fluctuations in supply and demand.

In the case of President Obama’s agenda, other provisions of the President’s proposal would make insurance costs even worse. His proposal would increase costs for insurers, while limiting their ability to offer different levels of coverage.  For example, a requirement for insurers to cover any and all applicants, regardless of pre-existing conditions, would encourage persons to put off buying insurance until they are sick. The Obama tax penalty, to enforce his proposed individual mandate to buy coverage, would be cheaper than the Obama specified health insurance premiums.  The potential result: even more uninsured.

According to Haislmaier, “Most policy makers who favor health care price controls view them as a way to curb rapid medical inflation. But most of the blame for that same inflation can be traced directly to previous government health care policies that they support or maintain. Health care price controls also are attractive to Members of Congress because they provide a benefit (cheaper medical care) to a favored constituency (health care consumers) at the expense of less favored constituencies (doctors, hospitals, pharmaceutical manufacturers, and insurance companies). This is why some Members of Congress are so quick to blame the health care industry for escalating medical costs, when in fact it is largely government laws, regulations, and policies that are responsible.”

Rather than bring back the old Nixon-era price controls for the insurance industry, the President should address causation behind increased premiums. His proposal  would only make the insurance market problems worse.