Insurance

Should Obamacare Be Struck Down In Its Entirety Rather Than Just Having Its Unconstitutional Parts Severed?

by Hans Bader on December 16, 2010 · 1 comment

in Healthcare, Legal, Nanny State, Personal Liberty, Regulation

In his ruling striking down Obamacare’s individual mandate (requirement that people buy health insurance), Judge Hudson in Richmond declined to strike down the rest of the law, believing that the unconstitutional part of Obamacare, which violated constitutional federalism constraints, could be severed from the rest of the law. But the health care law lacks a severability clause, and lawyer Ken Klukowski filed a brief in Florida’s challenge to Obamacare explaining why the entire law should logically be struck down. In Reason, Peter Suderman explains why even if Obamacare is not struck down in its entirety, the courts should at least strike down some other provisions that are related to the individual mandate, such as Obamacare’s ban on insurers taking into account pre-existing conditions.

As I noted earlier in The Washington Examiner, “To justify preserving the rest of the law, the judge cited a 2010 Supreme Court ruling 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.

Moreover, even if a single unconstitutional provision could be severed from Obamacare to preserve the remainder, that would not fix its other constitutional violations. The individual mandate, which exceeds Congress’ power under the Interstate Commerce Clause, is not the only unconstitutional provision in the health care law. Obamacare also violates the Tenth Amendment through Medicaid expansion provisions that transgress spending-clause limits applicable to federal-state programs, as I explain in an amicus brief for two governors in Florida v. HHS.

Law Professor James Blumstein, a constitutional and healthcare expert and advisor to Gov. Phil Bredesen (D-Tenn.), makes a different, but powerful, constitutional argument here that is also based on the Constitution’s spending clause.

Earlier, I discussed some of the bad effects of Obamacare on patients, employers, consumers, and the insurance market.

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.

Insurance Lessons from Alabama

by Michelle Minton on October 25, 2010

in Insurance, Precaution & Risk, Regulation

While Alabama certainly has some ambiguous laws and archaic regulations, the federal government ought to take a lesson from Alabama when it comes to property insurance.

In an effort to keep the state’s insurer of last resort solvent (meaning it will have enough money to pay the claims people are likely to file), Bob Groves, manager of the state-run insurer, announced that they will no longer issue policies for homes built over or standing in water.

People who currently hold policies on a building in or over water can keep the insurance as long as they own the building and pay the premiums. But the association will not cover the new owners, and it will drop coverage when water encroaches on a building that is now on land.

While this will only affect 400 out of the 18,000+ policies held by the Alabama Insurance Underwriting Association, over time this policy will make the state-run insurer more stable and could potentially shrink the facility a little.

This is policy the federal flood insurance facility should emulate. As I wrote back in August, when it comes to the National Flood Insurance Program, a division of FEMA, some in Congress have been doing just the opposite. They are attempting to expand coverage so not only are homes that repeatedly flood covered, but also homes that are likely to suffer wind damage.

One of the results of NFIP’s covering high-risk properties and undercharging premiums is that its debt has ballooned and it requested a bailout to the tune of about $20 billion.

The problem occurs when the government, either state or federal, starts underwriting property insurance at reduced rates. This encourages people to continue risky behavior, to forgo mitigation efforts (like cutting down trees, raising property, hardening roof structures), to continue building in risky areas, and it pushes out private insurers who can not compete with taxpayer-funded insurance facilities.

While the best case scenario is that the Alabama state-run insurer gets completely out of the market, this is one small step toward solvency. At least they are less likely now to need a bailout from the federal government (the American taxpayers). Hopefully those in Congress will learn a little something from the Yellowhammer State.

Obamacare: More Broken Promises, More Premium Hikes, More Lost Health Insurance

by Hans Bader on October 22, 2010

in Deregulate to Stimulate, Economy, Healthcare, Legal, Regulation

In The Washington Times, Dr. Milton R. Wolf debunks six “unkeepable Obamacare promises” that have already been shown to be false.  For example, President Obama promised that his health care overhaul would not raise taxes on anyone earning less than $250,000 a year: “I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

But as Wolf notes, Obamacare’s “new excise taxes on pharmaceuticals and medical products will, of course, by necessity be passed on to the patients who depend on these lifesaving medicines, pacemakers, MRI machines or even tongue depressors.”  And Nancy Pelosi promised that Obamacare would create 4 million new jobs, 400,000 almost immediately, none of which ever materialized.

A political commentator notes that her family’s insurance premiums just went up by 45 percent, while the coverage became worse. One of her readers lost her insurance, after her family’s policy was canceled by the insurer due to Obamacare’s legal prohibitions.

We earlier discussed how Obamacare will create pointless red tape and busywork for doctors, and how it has already led to big premium increases, and the elimination of some popular health plans.  It also includes a $60 billion insurance excise tax that will be passed on to patients, and tax increases on some investors and homeowners starting in 2013.

Insurance Regulators Approve Increases Based on Obamacare

by Hans Bader on September 19, 2010 · 4 comments

in Health and Illness, Healthcare, Insurance, Politics as Usual, Regulation, Sanctimony, Zeitgeist

In Connecticut, insurance rate regulators have approved hikes in insurance premiums of up to 20 percent, agreeing with insurers that Obamacare increased their costs. Some people will now pay thousands of dollars a year more as a result.

This contradicts claims made by President Obama and his aides that the new health care law would cut health care costs and bend the cost curve down.

Employers like AT&T, Caterpillar, John Deere, and Verizon have already reported major cost increases due to the new health care law.

As noted earlier, the health care law raises taxes on the middle-class and investors in future years. Obamacare will cause many harms, such as reducing life-saving medical innovation and increasing state budget deficits. It is based on accounting gimmicks that will increase the federal deficit, as even some Obama supporters have admitted — like David Brooks, who in a moment of candor called arguments for the bill ““unbelievable” and “insane.””

Obama to Insurers: Stop Telling the Truth

by Michelle Minton on September 13, 2010 · 4 comments

in Insurance, Odds & Ends

During the fight for health insurance reform earlier this year, opponents of the bill (aka Obamacare) claimed that the proposal would increase the cost of insurance in the U.S. The bill passed and low and behold premiums are on the rise. Rather than own up to the fact that their policies are going to cost Americans more money, the Obama administration is threatening insurers who raise premiums and blame Obamacare.

Late last week the The Wall Street Journal reported that Health and Human Services Secretary Kathleen Sebelius sent a letter warning  insurers that the federal government wouldn’t sit “idly by”  while insurance companies raised premiums and blamed the hikes on new regulations:

She warned that bad actors may be excluded from new health insurance markets that will open in 2014 under the law. They’d lose out on a big pool of customers, as many as 30 million people nationwide.

Though some insurers are raising rates by as much as 9 percent in a year, the insurance lobby claims the hikes are justified by the new costs associated with the requirements of Obamacare, as well as increasing costs due to other factors such as a poor economy and increasing medical care costs.

Although the law’s big expansion of coverage under the law won’t take place until 2014, several new benefits go into effect starting later this month. Lifetime dollar caps on coverage are abolished, and plans must allow parents to keep their children on the policy up to age 26. Many plans will also have to guarantee coverage for children regardless of a medical condition, and provide preventive care with no cost-sharing for the patient.

Really, the Obama administration doesn’t seem to take offense at the increasing costs, but they are angry that insurance companies are blaming the increasing premiums on, among other things, Obamacare — what Sebelius calls “misinformation.” This opinion piece in The Wall Street Journal hit the nail on the head calling the Obama administration’s admonition of the insurance industry an attempt to distance their policies from the real-world results.

This method of reality denial has been employed in several other scenarios around the country with almost exclusively disastrous results. In Florida, politicians prevented insurance companies from charging adequate rates as well as creating a government property insurer to compete. The result was a mass exodus of private insurance companies from the Florida property insurance market (which put more pressure on the state insurer). In Michigan auto insurance companies are required to sell unlimited personal insurance protection with each policy; the result is Michigan having the second highest premium rates in the nation.

The Obama administration can deny it and even force insurance companies to cover it up, but the reality is that increasing services will necessarily increase costs. It could also result in increased premiums unless the government prevents companies from charging the rates they need to in order to provide the services they are contracted for… but that will simply result in fewer insurance companies. Eventually, we could be left with only one insurance company; the government-run health insurance company, which will not be cost effective.

If we want more services at a lower cost we need to get government out of the way and let insurance companies operate at their highest efficiency level while customers can choose the options that fit their lives and budgets.

Government Insurance: Guaranteed to Fail

by Michelle Minton on August 27, 2010 · 2 comments

in Insurance, Odds & Ends

Few observers were shocked when the Federal Emergency Management Association (FEMA) asked for a nearly $20 billion bailout of its National Flood Insurance Program (NFIP). For years groups and individuals have warned that NFIP was underfunded and increasing its liability each year by not encouraging consumers to move or alter their homes in a way that would limit future losses. The availability of government provided insurance allowed people to continue building in at-risk areas like Florida’s coastline. The big problem? Government run insurance providers are not motivated to charge adequate rates, keep costs down, or encourage consumers to alter their homes to prevent further damage. As this USA Today article cites a notable anecdote that, unfortunately, isn’t all that uncommon:

In Wilkinson County, Miss., a home has been flooded 34 times since 1978.

Extraordinary as the damage may be, even more extraordinary is that an insurer has paid claims every time, required no flood proofing, never raised premiums after a claim and vowed to continue insuring the house. Forever.

The home’s value is $69,900. Yet the total insurance payments are nearly 10 times that: $663,000.

It’s no surprise that the insurer faces huge financial problems.

The insurer? The federal government.

Government run programs fail to send the appropriate “safety” signals about consumer behavior, but their presence in the market also makes it more difficult for private insurance companies to compete. In Florida, for example, the state-run wind insurer (Citizens Insurance Corp.) was meant as a “last resort” for consumers who could not find coverage anywhere in the market. Eventually, the company charged rates that were so low that private insurance companies could not compete and chose to leave the state, resulting in more people becoming reliant on the government-backed programs.

For these reasons, CEI along with a diverse coalition of consumer, taxpayer, and environmental groups vehemently opposed proposals to expand the National Flood Insurance Program to include other perils, like wind.

Back in 2008, former CEI Senior Fellow Eli Lehrer had this to say about plans to expand the National Flood Insurance Program:

“…America’s most important flood control program-the none-too-creatively named National Flood Insurance Program (NFIP)- faces serious troubles. In its current state, it drains the Treasury, damages the environment, and encourages unwise development. At minimum, it needs a restructuring that puts environmental and fiscal responsibility ahead of the questionable short-term desire of some for lower insurance rates in flood-prone areas.

Given that it sells insurance for less than any private company would, the program is a fiscal disaster. Although it theoretically, “borrows” money from the Treasury rather than actually raiding it, its fiscal state doesnt really make it possible for NFIP to pay back its debts. Right now, it owes the Treasury almost $18 billion and has no practical way to pay it back.”

Not only was this fiscal head-on-collision ignored by many in congress, some wanted to increase the liability it owed by adding wind coverage-that is, allowing the federal government to cover hurricane damage. With states like Florida getting hit hard nearly every season the potential liability would be enormous.

“Findings by research firm Towers Perrin predicted losses up to $200 billion if a federal program replaces private sector catastrophic wind insurance.”

If Americans want to avoid these fiscal catastrophes in the future, we must get the government out of the business of private enterprise and allow profit-motivated companies offer rates that actually reflect the risk of certain behavior. If consumers don’t like the cost of insurance for a potential home on the beach then they might consider buying a home far away from the dangers of hurricane winds, rather than relying on US taxpayers to bail them out after their home is damaged year after year.

Barring Illegals from Driver’s Licenses: Dangerous and Dumb

by Michelle Minton on August 26, 2010

in Odds & Ends

Regardless of how one feels about immigration policy in the U.S., allowing immigrants to obtain a driver’s license is clearly beneficial for society as a whole. Insurance News recently highlighted a usually unseen business product that highlights why letting illegal aliens operate within the laws of the U.S. is better than closing our eyes and pretending that making it illegal for illegals to drive will stop them from taking to the roadways.

Three states in the nation still allow residents to obtain driver’s licensing without providing proof of citizenship, though there is a movement to change that. However, few states explicitly require insurance companies to ask for proof of citizenship in order to write policies. Presumably, one reason lawmakers have not yet attempted to require proof of citizenship is because they recognize the benefit of having a greater number of insured drivers on the roads. The reality of the situation is summed up nicely by John Rost, founder and president of Fiesta Auto Insurance Co:

“People would like to believe that an undocumented individual wouldn’t buy a car, or if they had a car and didn’t have a driver’s license, they wouldn’t drive to work,” Rost said. “That’s clearly not the case.”

Yet, most states prevent illegals from obtaining licenses. Does this stop them from driving? No. It only makes it more likely that they will not understand the traffic laws and will be more likely to cause an accident.

At least, when uneducated driver (not necessarily through any fault of their own), they might have insurance.

Hopes for Federal Property Insurance Expansion: Gone with the Wind

by Michelle Minton on July 23, 2010 · 5 comments

in Bailout Watch, Insurance

Insurance industry members are wiping there collective brow after a bill was pulled from the floor of the House of Representatives before a vote. However, every taxpayer in the US should be breathing a sigh of relief. The bill, H.R. 1264 proposed to add wind insurance coverage to the National Flood Insurance Program (NFIP), which provides federal coverage in the wake of a catastrophe. A persistent idea on the hill, the effort to add wind and other perils to the Federal insurance program has, in recent years, been championed by Rep. Gene Taylor, D-Miss., who lost his home during Katrina in 2005.

Whatever their intentions, adding another peril for the federal government to deal with is clearly a bad idea on all fronts–whether from a fiscal, public safety, or free market perspective. The NFIP is already more than $19 billion in debt and counting–a debt that is paid for by every American, regardless of where they live. Estimates claim that the addition of just wind would increase that liability 5-fold. Of course, as we can see by looking at other government run insurance programs, the longer they operate the greater the liability becomes–this is due in part to inefficient underwriting and in part to the moral hazard that subsidizing risky behavior represents.

On July 21, just days before House members planned to vote on the measure, the Obama administration announced its opposition to the addition of wind to the NFIP (as the Bush administration had done in 2008).

The Administration recognizes that the availability of hazard insurance is a key element in the ability of individuals and communities to recover from disasters. However, the Administration opposes House passage of H.R. 1264, which would expand the Federal Government’s role to provide windstorm insurance that is already readily available in the private sector and through State insurance plans without Federal aid….expanding NFIP to cover windstorm insurance would unnecessarily duplicate available insurance products and could “crowd out” such products where they are offered, while offering little to no savings to the American public. At a time when the NFIP is already facing serious challenges, the Administration cannot support such an expansion

There are several fundamental reasons why adding wind insurance to the NFIP is a bad idea.

1. It would undercut competition and increase the national debt:

Private insurance is available. It might not be as inexpensive as people living on the coasts would like, but private insurers are willing to underwrite almost any risk for an adequate premium. When the federal government provides a cheaper version of insurance (under-priced through the miracle of taxes) it prompts consumers to leave their private insurance company for the less expensive option.  This puts increasing pressure on the federal insurance and American taxpayer.

2. Government run insurance programs can’t spread risks as far as private insurance

Private insurance  companies can spread risk by holding policies around the world that are unlikely to occur at the same time. This means that while they are paying claims for a hurricane in Florida, they are still collecting money from premiums on Japanese earthquake insurance policies. The US government is necessarily limited to pooling all of its risk within the USA which makes it much more likely that events will occur at the same time.

3. Cheap insurance doesn’t discourage bad behavior

When priced correctly, insurance provides feedback for the relative riskiness of a person’s decisions. If someone buys a house on the SC coast, they are more likely to have their home destroyed in a storm surge than someone living in the middle of Wisconsin. Therefore, their private insurance company will charge them more money for hurricane insurance. When we remove this feedback (aka remove the expense of insurance from the decision to move to a home on the beach) we encourage more people to engage in risky behavior. If the federal government provides cheap insurance for homes on the beach more people will build their homes there–putting themselves and their homes at risk and increasing the likelihood that everyone else in the country will end up bailing them out.

While the bill could still be brought up, it is a good thing that the Administration and a large number of Representatives have expressed their opposition to this expansion of government. Of course, all of the arguments against federal wind insurance apply to all other forms of insurance as well.

FL property insurance: turning a blind eye is not reform

by Michelle Minton on June 15, 2010 · 1 comment

in Bailout Watch, Insurance, Odds & Ends

While deregulation is always a good thing, we shouldn’t be fooled into believing that the recent news that Florida’s office of insurance regulation has “relaxed their standards of solvency” is anything akin to deregulation or reform. Insurance companies, property owners, and taxpayers remain in a situation as precarious as a beachfront home in the middle of hurricane season.

Insurance companies in the state of Florida will now be allowed to continue operating despite having a level of funds that previously would have had their license to operate revoked. What this means is an insurance company that by industry standards (you know, the standards that actually reflect the reality of a situation) doesn’t have enough money to pay their customers in the event of a reasonably likely hurricane season, is perfectly fine by the new standards of the Floridian government.

This news comes on the heels of a veto vote by governor, Charlie Crist on a measure that would have allowed insurers to charge higher rates (a measure he worked on and supported prior to his separation with the Republican party). Allowing insurance companies to charge the rates they want would have allowed them to rebuild their underfunded coffers–the one thing that would actually represent a real step toward reforming Florida’s insurance market.

So, while it is great that the state won’t step in and shut down companies, insurers in Florida are no less prepared to weather a bad hurricane season and just as likely to find themselves needing state assistance to pay claims after a storm. And because the state has an underfunded catastrophe fund the very likely event of a bad hurricane season could send the state of Florida begging for money from the federal government and every taxpayer in the country to pay for beach homeowners who have been paying too little for insurance for too many years.

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