How To Get Cheaper, Better Health Insurance

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One of the most criticised aspects of our health insurance system has been the lack of competition in many regions. As we pointed out a few weeks ago, in many states there simply isn’t any competition at all. There’s just one big insurer who can exercise all sorts of monopoly power.

Indeed, this lack of competition has become a talking point for the supporters of the Obama administration’s reform proposals. They point out that GOP fears that a “public option” would destroy the benefits of a competitive market are misguided since in much of the country there isn’t really a competitive market anyway.

But is the lack of competition a “market failure?” Not really. It’s the result of state regulatory restrictions and mandates that makes many insurers choose to avoid certain jurisdictions and makes it unduly costly to operate in across several states.

One way of looking at this is to say that the state legislatures, regulators and courts that impose these regulations are choosing the costs of monopoly over the benefits of competition in order to get the kind of health care plans they want. That is, they want mandatory benefits for mental health care or severe legal costs for denying benefits even if this means that consumers pay higher costs for health care. Some states take this to such an extreme that they find they’re no competition at all to provide insurance for their citizens.

But this ignores the role of special interests in the health insurance debate–in particular, health insurers. You see, it’s not really the broad citizenry choosing to have monopoly creating costs of regulatory compliance. It’s three sets of special interests: the people with rare conditions they demand will be covered, the professional who want to provide services to those people and the insurance company that wants regulations designed to prevent other companies from competing with them. The last–the insurance company–has the most powerful incentive for upping the regulatory costs and is usually the most powerful special interest in this mix.

This means that the lack of competition is a bigger problem than it would seem. If it were just a product of the choices of the people living in a state, we’d be better off letting them live with the consequences of those choices. People who didn’t like the outcome could flee to more libertarian states. But since it special interest capture of the regulations driving the lack of competition, we might want to investigate possible policy responses.

The problems with the current regulatory structure have prompted calls for state regulation of insurance to be replaced by federal regulation. That’s a plausible response but there’s no reason to suppose that we wouldn’t end up in a similiar situation: big insurers using regulations to dampen competition. In fact, this is part of what some insurers are lobbying for right now. 

Fortunately, we have an alternative that allow us to utilise the benefits of our federal system. Law professor Larry Ribstein argues in a recent article that the way to solve the problem is to allow an insurance company licensed in any state to operate in any other state.

“The goal is to balance states’ power to regulate against the significant benefits of creating state competition and a national market,” Ribstein writes.

Applying this to the context of health insurance–Ribstein’s argument is about the broader insurance market–it would be necessary to have federal rules limiting state mandates to ball below a maximum required insurance level. In other words, the federal government would decide what states should be able to mandate in their states. Below that level, states would be free to decide exactly how much and what types of coverage they want to mandate.

Of course, this would only effectively create competition in many states if the federal maximum was lower than the current rules that apply in monopoly insurer states. And it is hard to imagine the Obama administration telling the states that they have to stop forcing insurance companies to cover so many different types of ailments.