The Spectacle Blog

How to Get Real Competition in Health Insurance

By on 7.30.09 | 11:01AM

One of the arguments liberals have repeated in making their case for the creation of a government-run plan is the idea that there isn't enough competition in the health insurance market. Last month, the liberal activist group Health Care for America Now released a study finding that in most states, just a handful of insurers dominate the market, leading to skyrocking premiums. "This is the starkest evidence yet that the private health care insurance market is in bad need of some healthy competition,” Sen. Chuck Schumer said of the report. "A public health insurance option is critical to ensure the greatest amount of choice possible for consumers."

This is just the latest example of liberals arguing for a  government solution to a problem that was created by government.

To start with, liberals -- particularly those who support single-payer -- typically argue that the health insurance market is too "fragmented." The 1,300 insurance companies in America, they say, carve up the risk pool instead of allowing the risk to be shared among the broader population.

Greg Scandlen, President of Consumers for Health Care Choices, testified before Congress on this very issue. During his testimony, he recounted that in the late 1980s insurance regulators determined that, "the small group market was suffering from an excess of competition that was confusing to purchasers. They thought it would be better if there were only three or four competing companies in each state."

As a result, they imposed a raft of new regulations on insurers, and Scandlen explained:

All of these regulations, however well-intentioned, add to the cost of coverage. Moreover, many carriers found it expensive and difficult to comply with all the varying requirements of many different states, especially as the requirements changed from year to year. As a consequence, many carriers decided to get out of the health business and sold off their blocks of business to larger carriers who could afford the compliance costs. This is the primary cause of concentration in this market.

Regulation, in other words, creates what economists call "barriers to entry" into a given market, rigging the game in favor of larger companies with deep pockets.

At the same time they have pushed for more regulation, liberals have fought the introduction of new kinds of insurance products, such as health savings accounts, which have been one of the few areas where we've seen new players enter the insurance market. But they are still subject to heavy restrictions.

If the goal is to increase competition in the insurance market, the solution is pretty simple. Stop fighting the introduction of innovative new insurance policies. Cut down on unnecessary regulation. And create a national market for insurance by allowing Americans to purchase insurance across state lines, as Rep. John Shaddegg has been pushing for years. As an alternative, Scandlen suggests giving insurers the option of being federally chartered (allowing them to operate nationally) or state chartered (allowing them to operate only in a single state), which would counter the liberal argument that if purchasing insurance across state lines were allowed, all insurers would move to the state with the lowest standards.

Don't hold your breath for liberals to entertain any of these ideas for fostering competition. As Rep. Paul Ryan put it on MSNBC during his brilliant takedown of Nation editor Katrina vanden Heuvel, liberals are "using capitalist rhetoric to try and move a plan that is inherently anti-market."

Liberals want to create a system in which government provides subsidies to individuals to purchase insurance on a government-run exchange, and to create a new government-run health care plan modeled after Medicare. Even if this doesn't ultimately lead to a single-payer system (as I and many others believe), it's clear that the only insurers who could possibly go up against the government would be the very large insurers. This is not a plan to tackle the problem of consolidation in the insurance market -- it is a plan to accelerate it.

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