Obama administration eyeing price controls in health insurance

With one part of Obamanomics taking us back to 1963, why not have another take us back to 1971?  That was the year that Richard Nixon promised to control inflation and return stability to the American economy by imposing price controls, a decision that backfired and helped lead to artificial shortages and a decade of stagflation.  Almost 40 years later, Barack Obama offers his version of Nixonian economics, this time on health insurance:

In a shot across the bow to the insurance industry Tuesday, President Obama warned companies facing higher costs in part because of his health care law not to hike their prices, saying “we’ll be watching closely.”

Backing up his rhetoric behind the scenes, the Department of Health and Human Services (HHS) is quietly working on a new regulation to determine when insurance price increases are “unreasonable” and potentially prohibited by law.

The move may provide political cover heading into November’s elections as the President tries to keep the public from linking recent premium hikes to his newly-passed health care law.

But critics warn price controls could lead to either rationing or insurance companies going out of business, and point to Massachusetts’s experience with insurance price controls as a cautionary tale of what happens when pricing “turns political.”

It’s also a cautionary tale about allowing politicians to run the private sector.  Obama, Nancy Pelosi, and their allies wasted no opportunity to cast health-insurance companies as “villains” and profiteers, but the truth is much different.  The health-insurance sector is already a low-margin industry with profits between 2-6% in any of the years over the last decade.  Pricing has remained pretty close to the bone as it is, and in states with price-fixing schemes like Massachusetts, they’ve already begun to go out of business.

Price is not the same as cost, especially when government intervenes in markets to disturb the pricing equilibrium.  Price hikes in competitive markets only come when an increase in costs force providers to raise prices to meet them.  Presumably, either other providers have the same price pressures, or an inefficient use of resources resulting in cost increases will force a provider out of business when it can’t price its product competitively.  The low margin in the industry indicates a high level of efficiency (as well as a heavy cost of existing government mandates), and hardly shows profiteering at all.

In the 1970s, price controls resulted in gas lines, meat shortages, and all sorts of artificial problems when government interfered with the pricing mechanisms of competitive markets.  Nixon did it for the same reasons Obama is building — evil corporations, nasty profiteering, and all of the class-warfare rhetoric anyone can stomach.  The result will still be the same.

If government caps prices so that insurance companies cannot cover the cost of providing its services, insurance companies will go out of business and shortages will drive up the actual cost of health care.  Remember, even though gasoline remained at a constant price, consumers had to wait hours to get their tanks filled — a cost of time that far outstripped the price increases that would have resulted without Nixon’s intervention.  One cannot escape cost by manipulating price for very long, if at all, a lesson we learned almost 40 years ago, and one Obama wants to learn the hard way all over again.