Insurance

Obamacare Stifles Job Creation, Causes Layoffs

by Hans Bader on December 28, 2011 · 1 comment

in Deregulate to Stimulate, Economy, Employment, Health and Illness, Healthcare, Insurance, Regulation

Post image for Obamacare Stifles Job Creation, Causes Layoffs

At Bloomberg News, Andrew Puzder, CEO of CKE Restaurants, Inc., explains how the 2010 healthcare law is preventing jobs from being created and resulting in layoffs.

For example, Puzder notes, CKE Restaurants, which operates Hardee’s and Carl’s Jr. restaurants, “will have to cut spending on new restaurant construction,” in order to “offset higher health-care expenses,” even though “building new restaurants is how” the company creates jobs.  Puzder argues that the increase in the company’s healthcare costs will “more than consume” the amount it ”spent on new restaurant construction last year, leaving nothing for growth.”  It “will also need to reduce” its “capital spending,” even though such spending creates jobs and enables the restaurant company to improve its infrastructure and maintain its business. Thus, its “ability to create new jobs could vanish.”

Puzder also points to the similar situation of “Grady Payne, chief executive officer of Connor Industries Inc., a supplier of cut lumber and assembled wood products” with 450 employees, who has laid out the unpleasant options facing “his company under the health-care law, each of which would cost $1 million or more,”  which is “‘more than the company makes.’ [Payne] concluded that his company’s goals have turned “from ‘hire-and-grow’ to ‘cut-and- survive.’”

Puzder also documents the complaints of Victoria Braden, the president and CEO of Braden Benefits Strategies Inc., “a corporate employee-benefits adviser”:

“[Braden] said adoption of the law led to immediate job cuts at her company as she scaled back an expansion into a new line of business. Obamacare ‘is devastating to my business, expensive for me and my clients to administer, and works against our goals of helping businesses to expand, and putting people back to work,’ she said.”

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Obamacare Costs Additional $50 Billion a Year More Than Predicted, Based on Yet Another False Assumption in Calculating its Costs

by Hans Bader on August 9, 2011

in Health and Illness, Healthcare, Insurance, Legal, Personal Liberty, Politics as Usual, Regulation, Zeitgeist

“Federal payments required by President Barack Obama’s health care law are being understated by as much as $50 billion per year because official budget forecasts ignore the cost of insuring many employees’ spouses and children, according to a new analysis. The result could cost the U.S. Treasury hundreds of billions of dollars during the first ten years of the new health care law’s implementation,” notes the Daily Caller.  “The Congressional Budget Office has never done a cost-estimate of this [because] they were expressly told to do their modeling on single [person] coverage,” and “the Joint Committee on Taxation directed the Congressional Budget Office to ignore family members when determining whether employees actually pay more than 9.5 percent of their household income on insurance” and thus qualify for government subsidies.

This is just the latest of many ways that Obamacare has been discovered to cost more than predicted.  Earlier, the CBO hiked its estimate of Obamacare’s costs by $115 billion, showing that the health care law would not, in fact, cut the deficit as promised.  Later, it became apparent that the cost estimate for Obamacare had been artificially reduced through double-counting of revenues.

Then, it became apparent that the cost of Obamacare’s Medicaid expansion provisions had been radically underestimated.  It turned out that its Medicaid expansion provisions, in addition to covering many poor or near-poor people, could also add up to five million early retirees to state Medicaid rolls. That financial risk was overlooked in the Medicaid actuary’s earlier estimate. As he conceded in January 2011, that “estimated increase in Medicaid enrollment is based on an assumption that Social Security benefits would continue to be included in the definition of income for determining Medicaid eligibility. If a strict application of the modified adjusted gross income definition is instead applied, as may be intended by the Act, then an additional 5 million or more Social Security early retirees would be potentially eligible for Medicaid coverage.” More recently, he said the stricter standard was “expected” to apply under the 2010 healthcare law, causing “significantly higher” Medicaid costs for states.  See True Cost of PPACA (Patient Protection and Affordable Care Act): Effects on the Budget and Jobs (March 30 testimony to Congress).

Obamacare is also harmful to the economy, medical innovation, and the healthcare system.  Earlier, I discussed some of the bad effects of Obamacare on patients, employers, consumers, and the insurance market.   I filed an amicus brief on behalf of state legislators explaining why Obamacare is unconstitutional under the Tenth Amendment and exceeds Congress’s power under the Commerce Clause.

More Confusion on Breast Cancer Screening

by Greg Conko on July 26, 2011

in Features, Health and Illness, Healthcare, Insurance, Regulation, Zeitgeist

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When the federal government’s Preventive Services Task Force recommended in November 2009 that most women under age 50 should stop having regular mammograms and that women 50 to 70 should cut back to one screening every other year, it ignited a huge controversy with some critics complaining that women were being patronized and short-changed on essential preventive health services and others claiming the move foreshadowed the carnage that might arise under Obamacare death panels. Indeed, many Obamacare advocates hailed the recommendations as the kind of evidence-based medicine we needed to adopt if we were ever to get escalating health care costs under control. And they railed on HHS Secretary Kathleen Sebelius for “caving in” to political pressure and disavowing the recommendations made by her own department.

Two other studies published last year suggested just the opposite, though, finding small but significant reductions in the risk of dying from breast cancer among women who began annual mammograms at age 40. The American College of Obstetricians and Gynecologists had been splitting the difference, advising women age 40 to 50 to get a mammogram every other year. But the organization has updated its guidelines, now recommending that “mammography screening be offered annually to women beginning at age 40.”

Of course, the debate isn’t over. The subject of when otherwise healthy women with an average expected risk of getting breast cancer should begin regular screenings has been a hot topic for well over a decade now. And plenty of different scientific research organizations have staked out scientifically-justifiable but conflicting positions on the procedure.  Perhaps the only clear conclusion we can draw from all the hubbub is that figuring out exactly when a medical intervention is or is not justified, is or is not cost-effective, and is or is not superior to a different intervention is pretty damn difficult.

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Bidding Bon Voyage to Nationalized Wind Insurance

by Michelle Minton on March 14, 2011

in Economy, Insurance, Precaution & Risk, Property Rights, Regulation

Post image for Bidding Bon Voyage to Nationalized Wind Insurance

According to several Gulf Coast legislators, the idea of adding wind insurance to the National Flood Insurance Program is not going to happen anytime soon. The “Taylor bill,” named for the Rep. Gene Taylor of Mississippi, failed to pick up support despite several attempts by Taylor — a result that made all free-market supporters and anyone not wishing to pay for beach homes in Florida breathe a sigh of relief. Recently, in an interview with the Mobile Press-Register, Mississippi Republican Rep. Steven Palazzo, who defeated Taylor in the 2011 midterm elections, confirmed that he is not going to support the idea of adding wind coverage to NFIP: ”If that (Taylor) bill would have a chance of passing, I would support it. I would endorse it… I think that ship has sailed.”

Rep. Jo Bonner, from Mobile, also stated that he thought it was “highly unlikely” that Taylor’s proposal would be adopted.

Even former Rep. Gene Taylor himself expressed doubts that his proposed expansion of the national insurance program would go far, giving it a “snowball’s chance in hell.” The National Flood Insurance Program (NFIP), which insures about 5.5 million Americans, is in serious trouble and has been for decades. Currently, the program — which is part of FEMA — is more than $18 billion in debt and is set to expire in September 2011. Part of the reason for NFIP’s dire situation can be attributed to Hurricanes Rita and Katrina, but the core problem is that insurance can’t operate when it is run by politicians (who, by their nature, care more about their popularity than the fiscal solvency of an insurance program).  First of all, the maps that are used to set rates on policies are severely out-of-date. This means that homes that appear to be sitting in a place where they are not likely to flood actually could be in high-risk areas. The program undercharges these policyholders and thereby doesn’t have the money to cover the losses. Attempts to update the maps have been met with resistance because the result will be that some folks will find out that they are now in flood zones (as if they didn’t know already from annual flooding) and end up with higher rates.

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The GOP and the Health Insurance Mandate

by Greg Conko on February 2, 2011 · 2 comments

in Health and Illness, Healthcare, Insurance, Personal Liberty, Regulation, Zeitgeist

With the health insurance individual purchase mandate looking more vulnerable than ever, Democrats are trying desperately to get some mileage out of the fact that it was Republicans who first proposed the idea. Washington Post blogger Ezra Klein posted an interview yesterday afternoon with University of Pennsylvania economist Mark Pauly, who is sometimes identified as the “father of the individual mandate.” Klein writes:

“Pauly was the lead author of a Health Affairs paper attempting to persuade President George H.W. Bush and his administration to adopt a universal health-care proposal that would keep the government from eventually taking over the sector. … At the heart of that strategy was the individual mandate, which would go on to be promoted by congressional Republicans, the Heritage Foundation, and Massachusetts Gov. Mitt Romney before being adopted by Democrats and becoming a bete noire of conservatives.”

It’s true, of course, that Republicans seized on the purchase mandate idea, as Pauly suggests, “because we were concerned about the specter of single payer insurance, which isn’t market-oriented, and we didn’t think was a good idea. One feature was the individual mandate. The purpose of it was to round up the stragglers who wouldn’t be brought in by subsidies.” In a 1991 paper published in the journal Health Affairs (pdf), Pauly and his co-authors wrote that, “Our view is that excessive government intervention will make matters worse. … Our strategy, therefore, is to design a scheme that limits governmental rules and incentives to the extent necessary to achieve the objectives.”

The GOP bit into it hook, line, and sinker. But a little context is necessary.

In November 1991, Democrat Harris Wofford beat expected favorite Dick Thornburg in a special election to replace deceased Pennsylvania Senator John Heinz in 1991, running primarily on a platform centered around universal health care. And the following year, Bill Clinton won the presidency after making universal health care a central feature of his campaign. There was genuine fear among Republicans that First Lady Hillary Clinton’s Health Care Task Force would propose legislation that included a single payer plan, so Republicans scrambled to design their own proposals that would be “less bad.”

Republican Senator John Chaffee introduced the Health Equity and Access Reform Today Act, and Republican Senator Don Nickles and Rep. Cliff Stearns introduced the Consumer Choice Health Security Act, both of which contained an individual health insurance purchase mandate and attracted dozens of Republican co-sponsors. (As an aside, Democrats have seized on liberal Republican Chaffee’s bill as an example of conservative hypocrisy while ignoring the bill introduced by actual conservatives Nickles and Stearns. It’s not clear why this is. Perhaps just laziness, but maybe I’m just reading into things?) And, as has been pointed out repeatedly, the conservative Heritage Foundation entertained a similar feature, and then Massachusetts Governor Mitt Romney also included a purchase mandate in his state’s health care overhaul, for which both should be roundly condemned.

It’s worth noting, though, that most of us in the free market movement have never embraced the health insurance purchase mandate. And I’m proud to dig out of the archives an old Cato Institute paper (pdf) written by my former CEI colleague Tom Miller (now at the American Enterprise Institute), which roundly criticizes the 1993-94 Republican compromise legislation. Tom found a lot of faults in those bills, and he singled out the individual purchase mandate as being especially egregious.  While acknowledging that, from a political perspective, “any legislative alternative to the Clinton plan must guarantee universal coverage,” he wrote:

The most troubling aspect of the Nickles-Stearns legislation, as introduced on November 20 [1993], is the mandate that it imposes on all Americans to purchase a standard package of health insurance benefits. By endorsing the concept of compulsory universal insurance coverage, Nickles-Stearns undermines the traditional principles of personal liberty and individual responsibility that provide essential bulwarks against all-intrusive governmental control of health care.

Tom concluded that, “By failing to provide a clear alternative based on market principles, Nickles-Stearns blurs opposition to Clinton-style health care legislation. By focusing the political debate on the wrong issues, it opens the door to extensive political interference in private health care decisions.” Indeed.

Obamacare Struck Down by Florida Judge; Properly Applies Severability Principles to Invalidate Whole Law

by Hans Bader on January 31, 2011 · 9 comments

in Health and Illness, Healthcare, Insurance, Legal, Nanny State, Personal Liberty, Regulation

A judge in Florida just declared the health care law known as “Obamacare” unconstitutional, ruling it void in its entirety. Judge Vinson rightly declared the health care law’s individual mandate unconstitutional, since the inactivity of not buying health insurance is not an “economic activity” that Congress has the power to regulate under the Interstate Commerce Clause. (Under the Supreme Court’s decision in United States v. Morrison (2000), which I helped litigate, only “economic activity” can be regulated under the Commerce Clause, with the possible exception of those non-economic activities that harm instrumentalities of interstate commerce or cross state lines.)

Judge Vinson also rightly declared the law as a whole unconstitutional. The health care law lacks a severability clause. So if a major provision like the individual mandate is unconstitutional — as it indeed was — then the whole law must be struck down.

The absence of a severability clause meant that, at a minimum, the burden of proof shifted to the government to prove (among other things) that the law would have passed even without the individual-mandate provision later held unconstitutional. The government could not, and did not, meet that burden of proof, given the incredibly narrow margin by which the health care law passed in the House, and the fact that it circumvented a filibuster with no votes to spare in the Senate.

Earlier, a judge in Virginia declared Obamacare’s individual mandate unconstitutional, but declined to strike down the rest of the law.

As I noted earlier in The Washington Examiner, “To justify preserving the rest of the law, the judge” in the earlier Virginia case “cited a 2010 Supreme Court ruling [Free Enterprise Fund v. PCAOB] that invalidated part of a law — but kept the rest of it in force. But that case involved a law passed almost unanimously by Congress, which would have passed it even without the challenged provision. Obamacare is totally different. It was barely passed by a divided Congress, but only as a package. Supporters admitted that the unconstitutional part of it — the insurance mandate — was the law’s heart. Obamacare’s legion of special-interest giveaways that are ‘extraneous to health care’ does not alter that.” In short, Obamacare’s individual mandate is not “volitionally severable,” as case law requires.

The individual mandate provision also was not “functionally” severable from the rest of the law, since the very Congress that passed Obamacare deemed the individual absolutely “essential” to the Act’s overarching goals (as Judge Vinson in Florida correctly noted).

(In our amicus brief in the Florida case for Governors Tim Pawlenty and Donald L. Carcieri, we also argue that Obamacare violates the Tenth Amendment by exceeding Congress’s power under the Spending Clause, a so-called Pennhurst argument.)

Cato legal scholar Ilya Shapiro, who filed briefs against the law in Virginia, comments on today’s decision here, calling it a “victory for federalism and individual liberty.”

In footnote 27, the judge cited with approval the thoughtful brief of legal scholar Ken Klukowski explaining why Obamacare should be struck down in its entirety under settled principles of severability.

Driver Monitoring Increases Accuracy, Lowers Insurance Costs

by Michelle Minton on December 29, 2010

in Insurance, Precaution & Risk

Believe it or not, insurance companies do not want to overcharge you. They want to charge just the right amount — as little as possible — just enough to cover any potential claims you are likely to file. Insurers want to charge the least they possibly can without losing money so that they can compete with other insurance companies for your business. To a large degree, what makes an insurance company successful is its ability to accurately predict your future accidents, illness, and catastrophes.

The more they know about their customers’ risk factors, the less they can charge. If an insurer knows little or nothing about the risks of his customer, then he must “pad” the premium to account for all possible catastrophes that the insurance company will have to pay for. On the other hand, if an insurer knows with relative certainty the likelihood of his customer getting into a car accident in the next year, he can charge just what is needed to cover the predicted expense.

This is clearly evident in Allstate’s new driver monitoring program, Drive Wise, which tracks the average speed and frequency of short-breaking of drivers. Customers who enroll in the voluntary program receive an immediate 10 percent discount on their policy, regardless of what the result of the monitoring shows. How can Allstate afford to do this? The reality is that even though insurers can hypothesize with fair accuracy about driving habits based on the information a policy holder provides about his or her life, this monitoring program will increase the accuracy of such predictions a hundred-fold.  The increased predictability of a customer’s accident rate means that insurers can cut back on some of the padding and charge less. For good drivers enrolled in the program, their discounts could be as much as 30 percent.

Drivers and policy makers should embrace any method insurers utilize to increase the accuracy of their rate setting. Whether it is age, gender, education status, geographic location, credit scores, or a digital monitor, anything that helps insurance companies accurately predict risk will result in greater savings and more just rates for all.

Why Insurance Rates Rise in Calm Seasons

by Michelle Minton on December 9, 2010

in Insurance

This year’s hurricane season, which officially ended at the beginning of this month, was the third most active season on record for the Atlantic. However, few of those hurricanes made landfall and thus the U.S. experienced little damage in the unusually active season. Despite none of the 19 named storms making landfall in the U.S., homeowners in coastal states are seeing their premiums rise. Particularly in Florida, where the government has to approve rate increases, people are asking why rates should rise when the state hasn’t had a major storm in five years. What some observers fail to understand or choose to disbelieve is that insurance companies, particularly in states with rate controls, are still playing catch-up from the years of charging rates that were far too low. In addition, many insurance companies are increasingly investing in back-up insurance, known as reinsurance.

Safety net:

The way insurance works is that a company will charge an individual a “premium” based on the perceived likelihood that this person will need to make a claim on his or her insurance. In Florida, despite the years of luck, the likelihood that someone will need to make a claim on their property insurance is much higher. If there is a good year and no hurricanes, the insurance company will retain a “profit.” But that extra money doesn’t just get dolled out to shareholders; it is reserved for future disasters or allocated to claims around the country. And based on a recent report from The Tropical Meteorology Project at Colorado State University, we may not be so lucky in the next hurricane season:

Their “extended range” forecast calls for 17 named storms in the 2011 season, of which 9 will become hurricanes, and five will reach “major” hurricane strength at 111 mph  (Cat. 3) or higher. And while no 2010 hurricanes crossed the U.S. coastline, the CSU team said, “We would expect to see more landfalling hurricanes in 2010. The average is 1 in 4 Atlantic hurricanes making a landfall in the U.S.

Insurers need to prepare for future losses. And despite several years of no significant hurricane damage, many insurers cover all types of damages around the country. Their losses are usually not limited to one state or line of insurance.

Insurance on a global stage:

While some insurers are strictly based in one state and provide limited types of coverage, many insurers operate throughout the nation providing many different kinds of insurance (property, auto, etc). This is so that a hurricane in Florida can be paid by premiums of Californians and a mudslide in California can be paid by homeowners in Minnesota. This way an insurance company can remain “solvent,” that is, it can have enough money to pay all the claims year round. The greater diversity an insurance company has among its policy holders, the less likely it is to experience a disaster that depletes all of its funds at once. However, not all insurance companies can spread the risk around the nation and even those that do can purchase extra insurance, known as reinsurance, to further protect against catastrophic claims. Reinsurers provide insurance for insurance companies around the world.

Why rates rise:

Insurance rates rise when insurance companies can get state governments to allow them to rise. The goal of most insurance companies is to estimate risk and charge a rate that brings loss and income to an almost 1 to 1 ratio. This allows them to charge the lowest amount, to be competitive with other companies, while still having enough funds to pay claims and not lose money. Basically, insurance companies would like to “break even” when it comes to insurance premiums. (A big misconception about insurance companies is that they draw the majority of their profits from unused premiums; this is not the case. Insurance companies make the majority of their profits through “holding” premiums and investing them in other products.)

The reason insurance companies in states like Florida are constantly harping for a rise in the premium rates is because the state government has forced insurance companies to operate at a loss for many years. In addition, insurers in Florida were forced to give “mitigation credits” for homeowners who took steps to prevent damage. While mitigation is a good thing and something that insurers would normally reward with lower premiums, in Florida the rates are so depressed that mitigation only reduces the amount insurers are likely to lose; forcing them to give credits puts them back at square one in terms of loss-risk.

“In the short term, it was great for consumers. Premiums on homeowners’ policies were reduced anywhere from 20 to up to 70 percent…The long-term thing was that companies like Allstate and State Farm were being forced to give back 60 to 70 percent of the earnings they made the year before because of the discounts that were made available to consumers.” This according to Brad Emmons of Vero Insurance.

Despite common belief that insurers are flush with money and reports that claim shady dealings, two-thirds of insurance companies in Florida are operating at a net loss and non-hurricane-related costs are on the rise. According to one report, non-hurricane costs accounted for 65 percent of Florida insurers losses.

In the end, Florida is a risky place to live and government interference has decimated the insurance environment in the state. The answer is to continue to let rates rise until they represent true risk. Eventually, private insurers will re-enter the state’s market (once it is profitable again), reserve money will be secure, and rates will fall to a level that reflect the actual risk of building a home on a coastline that is prone to hurricanes and other natural disasters.

Beach House Bummer: State-Run Insurance Fuels Risky Coastal Development

by Michelle Minton on November 1, 2010

in Insurance

Wouldn’t we all like to have a beach house? A large number of Americans have a dream of living near the sea, but few of them have the financial ability to purchase a home along the pricey coast. For one thing, there is the cost of buying property in such a high-demand market with such a limited availability of space. In addition, there’s the high cost of insuring a home that is built in an area where it is likely to be damaged by natural catastrophes.

It is expensive to purchase insurance along a coast and there is a legitimate reason for that: homes built within a stone’s throw of the sea, or other large bodies of water, are far more likely to experience damage — damage that insurers ultimately pay to repair. So, in order to cover their likely costs of repairing homes after storms, insurers attempt to charge “actuarially sound rates,” or the amount of money they will likely need to pay out on a policy. For most people wishing to live on the beach, this actuarially sound rate is far out of their financial reach. Oh well, I guess you’ll just have to live inland in a nice quite neighborhood… unless you happen to live in a state with a government-funded insurance facility.

Moral Hazard:

When discussing “moral hazard” the term has particular significance in the realm of insurance. When insurance costs are suppressed and the rates do not reflect the relative riskiness of the insureds’ choices, people could end up making decisions that put their lives and financial livelihood in harm’s way.

When insurance premiums are high — usually as a result of greater risk (such as a precariously placed home or a car garaged in a dangerous neighborhood) purchasers are often prompted to mitigate their risks or make safer choices in an effort to reduce their insurance costs. Some will add storm shutters to their home, choose a safer neighborhood with less crime, or raise their home to prevent flooding. However, when those costs are skewed by government intervention, either by offering government insurance or forcing insurers to keep rates artificially low, the consequences are often that people will make choices that are likely to end in disaster.

As we at CEI have been saying for years, there is a reason that insurance for coastal properties is generally more expensive than other places: it’s riskier. When insurance commissioners force insurers to charge low rates for these properties or set up a state-run community funded program to provide insurance, they are making building on the coast a viable option for many more people. The results are exactly as predicted: more people have been building along the coasts and other environmentally sensitive areas.

The latest evidence is a study released last week from the Insurance Research Council (IRC), which concluded that state-run residual markets, such as those in Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina, and Texas, have provided the means for development in some of the nation’s areas that are most likely to experience natural catastrophes such as hurricanes, flooding, etc.

The programs were created as insurers of last resort, meant to provide coverage to residents where none was available. However, as the study shows, the “insurers of last resort” have quickly become competitors on the market.

For instance, in Florida, where 79 percent of the state’s total exposure is on the coast, the IRC found that the percentage of coastal exposure held by the state-run Citizens Property Insurance Corp. has doubled the past five years to 20 percent.

“The plan’s jump in market share over the past few years indicates [Citizens] is acting more as a competitor in the insurance market than as a market of last resort,” the study said.

Population growth in the states outlined in the report has grown “substantially,” which has “fueled the increase in demand for insurance” though private insurers have pulled back from many coastal markets due to the inability to get rates that match the risk, the IRC said.

If state legislators want to protect their residents from physical and financial harm, if they want to revive the economy and protect “environmentally sensitive” geographical regions, the best step they can take is to get out of the insurance business.

Hospital Cost-Shifting Leads to More Expensive Car Insurance

by Michelle Minton on October 29, 2010

in Insurance

Lawmakers’ policies are making your car insurance higher than it should be. Rather than solving the problems that government intervention is causing, however, politicians would rather blame “greedy” insurance companies and institute more interventionist policies.

For Michigan residents, the situation is particularly precarious. In the last decade the state has lost nearly a million residents, lost thousands of businesses, and likely witnessed greater economic rot than many other states throughout the economic downturn.

In CEI’s newly released joint study with the Mackinac Center, “Reforming Michigan’s Auto Insurance Industry,” Professor Gary Wolfram of Hillsdale College and Joseph Olson, the former Michigan insurance commissioner, nail down some of the reasons why Michigan drivers pay the second highest premiums in the nation.

Much of the paper focuses on the state’s mandatory purchasing of unlimited personal insurance protection (PIP). Because Michigan is also a “no-fault” state, the possible cost for each driver is unknown to insurance companies and potential unlimited — they could end up paying out millions of dollars, regardless of the driving abilities of their customers. (In no fault states, drivers are limited in their ability to sue for recovery of non-economic losses, such as damages for pain and suffering. In return for this limitation, the driver’s insurance company pays for economic losses, such as medical expenses and lost wages, regardless of who was at fault.)

Now the Insurance Research Council (IRC) has released a new paper documenting how the reimbursements from public health insurance programs (i.e., Medicare and Medicaid) have prompted hospitals to shift costs to automobile insurance companies. This has resulted in a nationwide rise in auto injury claim costs and has forced insurance companies to scrutinize and negotiate hospital bills prior to payment.

When applying the conclusions of the IRC study in conjunction with the CEI/Mackinac paper, it provides strong evidence in support of the claim that publicly funded programs, which are limited and have low reimbursement rates, have serious and expensive consequences on the cost of private insurance.

“The conventional wisdom is that hospitals aggressively seek to shift costs from public insurance programs to private payers such as auto insurance companies,” said Elizabeth Sprinkel, Senior Vice President of the IRC. “With this study, we now have information on the magnitude of cost shifting and a better understanding of the need for supportive state laws and effective tools that will enable auto insurers to pay hospitals appropriately and help control auto injury claim costs,” said Sprinkel.

With the recent individual health care mandate (aka Obamacare) on its way, the consequences of this cost-shifting could have dire consequences for a state like Michigan, where costs are potentially unlimited.

From the CEI/Mackinac study:

A major weakness in Michigan’s auto insurance system is the requirement for consumers to purchase unlimited personal injury protection, for several reasons. First, as any economist will attest, people respond to incentives. Once third-party payment is introduced, and there is no limit on how much the third party must pay, then there is every incentive for health care providers to choose expensive methods for treating injury, and there is no incentive for the patient to restrain expenditures.

Insurance Information Institute President Robert Hartwig, in testimony before the Michigan House Insurance Committee, showed that Michigan’s high insurance premiums are being driven by rising medical costs associated with auto accidents. The average no-fault PIP claim rose by more than 250 percent from 1998 to 2007, reaching $31,383. Given the incentives by medical care providers to use expensive treatments, it is a problem that the state has no constraints on costs, such as medical fee schedules and treatment protocols.

Because Obamacare forces all residents to purchase some type of insurance, it is very likely that the flood of new Medicare and Medicaid subscribers will increase the strain on the program and decrease the amount of reimbursement. As a result, hospitals will continue shifting costs onto private insurance companies — like auto insurers. The potential increase in costs and increases in premiums could be astronomical.

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