Massachusetts Health Care Czars Endanger Hospitals
Last week the Associated Press published a series of recent e-mails written by Robert G. Dynan, Deputy Commission for Financial Analysis at the Massachusetts Division of Insurance.
In the e-mails, Mr. Dynan argues that denying health plans the ability to raise rates makes the solvency of Massachusetts’ HMOs difficult to assure. He went on to note that health plan insolvency also threatens the solvency of Massachusetts hospitals, since “they hold the lion’s share of the HMO receivables.”
The rapid escalation of health care costs that followed the 2006 health reform was not predicted by its supporters. State officials are reacting with calls for price controls on physicians, hospitals, medical imaging centers, and insurers. On April 1, Massachusetts Insurance Commissioner Joseph G. Murphy blocked health plans from increasing their rates for small group and individual subscribers. According to The Wall Street Journal, three of the largest four plans posted operating losses in 2009.
Mr. Dynan appears to have been “muzzled” since the appearance of the e-mails. On June 9th, The Boston Globe reported that Mr. Dynan “backtracked” after he was “chided” in an April 30th e-mail from Insurance Commissioner Joseph G. Murphy for making statements that were “unprofessional and counterproductive.” More detail is available from Avik Roy‘s June 11th post at National Review Online.
Although Mr. Dynan is to be applauded for understanding that health plans have to charge enough to pay for the bills for actual medical care that are generated by their members, the reasoning from one of his e-mails suggests that there are some holes in his understanding of economics, especially with respect to the role of profits:
Unlike most other states, Massachusetts has mostly non-profit health plans. Because they are non-profit, their profit margins are much narrower and thus there is less room for error. If they are incorrect in their estimates, they have little profit load to cover any contingencies. If they were to fail, the void may be filled by for-profit insurers that seek to maximize shareholder profits and declare dividends.
In Mr. Dynan’s world, non-profits make profits, they are just “narrower” profits than those made by for-profit firms. Profits are for covering contingencies, not for paying taxes or reasonable rates of return to the owners of capital at risk in a business. Doing that would require declaring dividends, an outcome that Mr. Dynan clearly considers a second best solution.
And if the non-profit insurers fail because their profits are too small, even Mr. Dynan, who clearly saw that other officials in charge of government run health care failed to grasp some basic financial facts of life, reverts to the magical thinking so common in government health policy circles: no matter what government does, disembodied for-profit businesses will spontaneously fill the voids created by feckless regulators and people will continue to receive health care of the same quality in the same quantity for ever and ever.
Those businesses will appear even though price controls create enormous losses for existing competitors, regulatory burdens make their products too expensive to afford, and the unintended consequences of Massachusetts health reform legislation are so bad that they threaten both the financial solvency of Massachusetts hospitals and, ultimately, the health care of Massachusetts citizens.
There is an almost religious fervor on the part of public health advocates that if everyone is forced, cajoled or provided with health coverage, medical costs will miraculously fall.
From an economic perspective, this makes absolutely no sense. Past research has found that insured people consume about double the care of the uninsured, all things equal.
If, by contrast, health coverage with low-deductibles and first dollar benefits was outlawed and everyone was forced to sock money away and pay cash for incidental care, prices (and medical expenditures) would fall.
I think this relates to that post a few weeks ago about how the left of center fail economics classes.
Mr. Dynan fantasizes that for-profit insurers would enter Massachusetts if the government made it imposible for non-profits to remain solvent. Why the heck would they do that? Does Mr. Dynan think that the state would treat for-profit insurers better than non-profits?
But I think Mr. Dynan is deluded if he thinks that he has figured out something unknown to his colleagues. Most of the architects of the Massachusetts take-over (as well as those of ObamaCare) know perfectly well that their “reforms” will drive private insurers into insolvency. They just won’t admit it publicly.
Such an outcome is not an accident, but an unstated goal – a waypoint en route to single-payer health care.
John Graham touches on an important point that is lost on most health care advocates.
A non-profit hospital or insurance company is just as interested in making money as a for-profit entity. Not-for-profit is a tax election. Any firm that consistently loses money or does not earn a profit (or at least break even) will go out of business. Non-profit insurers plow their profits back into expansion. Non-profit firms have an advantage in that they do not pay income taxes, property taxes or sales taxes. Non-profit firms also often get preferential interest rates on bonds.
If a non-profit insurer cannot survive in Massachusetts, a for-profit firm could not survive either.
Don’t nonprofits use capital? Don’t they put that capital at risk? “Profit” is the necessary return that must be paid to cover the social cost of that capital and that risk.
The fact that this social cost does not show up on the accounting statements of the nonprofits does not mean that the cost just vanishes. It is still there. It’s just disguised.