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How to Get Real Competition in Health Insurance

By Philip Klein 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.

View all comments (6) | Leave a comment

Zack| 7.30.09 @ 11:57AM

By having a Single-payer insurer and allowing free choice of doctors, we would be strengthening competition among small businesses (private physician practices). The current system allows for competition between giant corporations only. Single-Payer is PRO small business

Indiana Alex| 7.30.09 @ 2:05PM

No Zack, you wouldn't be able to chose your doctor. He might chose to opt out and only accept cash, rather than the pitance that government would dictate he may receive for his services.

Kennedy's doctor will fall outside of the plan.

M Horn| 8.7.09 @ 9:20AM

One concern in health insurance is adverse selection, i.e., the incentive for insurers to cherry pick the best risks--the young and health that do not need expensive medical care--and leave those with poor risk profiles--e.g., older people with weight issues, smokers, or diabetics or other pre-existing conditions--with few options aside from very expensive coverage with high deductibles. This is not really a socially optimal outcome since the people who really need coverage are denied it and the people who mostly dont pay premiums that end up as profits for insurers skilled at selecting the best risk profiles and denying coverage. One concern with the proposal to open up health insurance markets across state borders is that insurers would compete nationally to identify the best risks. This would likely result in greater industry consolidation since there are economies of scale in capturing the best risk pools. In a worst case scenario, a few giant insurers would pull in the best risks nationwide, so most of the country's premiums would go to administrative costs associated with selecting good risk profiles and denying care. At the same time, people with poor risk profiles would find it much harder to get coverage because insurers would compete to get the best risks and to avoid poor ones. I understand concern about government intrusion in markets, especially given how much influence monied special interests have in the Senate/House and other institutions. Yet the problem of adverse selection is real and cannot be ignored (asymmetric information is also a concern in markets with high complexity but not really unique to insurance). So my question to advocates of market solutions is how do you address adverse selection? Are you willing to regulate so that insurer cannot compete on risk profiling, e.g. setting a fixed schedule of rates for everyone (perhaps with modest allowances for age) and banning exclusion based on pre-existing conditions and the practice of recission except in cases of clear-cut fraud.

Sandy James| 9.12.09 @ 9:47AM

Mr Klien, how about answering the above posters question, M Horn.

William Tucker| 9.29.09 @ 1:07PM

I'll answer the question. Auto insurance involves approximately the same costs and risks as health insurance , but we don't have an auto insurance crisis. The reason health insurance is a problem is because:

1) the state legislatures have tacked on huge mandates that drive up the price of insurance; and

2) 2/3 of the non-elderly population is able to avoid buying insurance by receiving health benefits at their jobs.

There has already been a huge "adverse selection" when the generally healthy working population has already been awarded job benefits. The solution should be to level the playing field, either by taking away the tax exemption for job-related health beneifts or allowing the same exemption to everyone who has to buy insurance in the much-diminished private market.

The states have solved the problem of "unhealthy" drivers by setting up high-risk pools. The same could be done for unhealthy people without nationalizing healthcare or putting everyone under a single-payer system.

Rob| 9.29.09 @ 4:37PM

Why do states need to wait for permission from the federal government before giving insurers the option of providing health insurance that is "state chartered (allowing them to operate only in a single state)"? Surely the Tenth Amendment would apply here, as no interstate commerce is involved. I'd like to see one of the states that has passed a sovereignty resolution per the Tenth Amendment take action on state-chartered health insurance, explicitly invoking the Tenth Amendment. Any Republican lawmakers listening?