Fortune rips Romneycare and Obamacare; won't contain costs

The Obama bill does nothing to eliminate regulations that effectively cartelize the market.

The combination of heavily subsidized demand and tight, over-regulated supply is a textbook formula for perpetuating the big, chronic price increases that bedevil today's health-care system.

Instead of attacking the real causes of the explosion in costs -- the combination of overly generous state aid and a dearth of competition among hospitals and physician groups -- Massachusetts is vilifying prestigious, non-profit insurers, and punishing them, believe it nor not, with price controls. In April, Governor Deval Patrick refused the request of carriers such as Harvard Pilgrim, the top-rated plan in the country, for premium increases of 8% to 32%. Instead, his administration is refusing all rate hikes over 7.7%; any rate requests the administration rejects are automatically held at 2009 levels.

In explosive emails released last week, Robert Dynan, chief of the financial analysis unit at the Division of Insurance, told Commissioner Joseph Murphy that the price caps would cause a "potential train wreck" and threatened "catastrophic consequences for the non-profit industry." Dynan warned that the non-profits, unlike national giants such as WellPoint (WLP, Fortune 500), operate on such slim margins that the controls could drive them into bankruptcy. Even now, four of the biggest insurers are threatening to stop taking new patients at rates so low they lose money on each new enrollee.

The battle in Massachusetts may foreshadow the results of the new federal law. It threatens to mirror precisely the cycle we're witnessing in the Bay State: spiraling costs that make coverage unaffordable for both patients and businesses, followed by price controls that drive private providers from the market. "This could repeat itself on the national level, and become the beginning of government-run health care," says Lora Pellegrini, chief of the Massachusetts Association of Health Plans.

That disaster scenario may sound far-fetched. But an examination of the Massachusetts plan yields five important lessons that show the dangers ahead for the Obama health-care blueprint.

Lesson 1: The Massachusetts plan does not control costs.

When Massachusetts launched its reform program in 2006, it already had the highest medical costs in the nation. Today, the burden is still rising far faster than wages or inflation, from those already lofty levels. A report from that state attorney general in March -- remember, this is a Democratic administration -- asked rhetorically "Can we expect the existing health-care market in Massachusetts to successfully contain health-care costs?" The report concluded, "To date, the answer is an unequivocal 'no.'"

Costs are rising relentlessly for both families and for the state government. The median annual premium for family plans jumped 10% from 2007 to 2009 to $14,300 -- again, that's a substantial rise on top of an already enormous number. For small businesses, the increase was 12%. In 2006, the state spent around $1 billion on Medicaid, subsidies for medium-to-lower earners, and other health-care programs. Today, the figure is $1.75 billion. The federal government absorbed half of the increase.