Arnold Kling  

Health Insurance Regulation

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Radley Balko and Michael Cannon propose changes in health insurance regulation.


Currently, many states require health insurers to charge the same premiums for any member of a group health plan, regardless of risk. This means that the costs of the donuts-and-pizza couch potato's unhealthy decisions are imposed on the gym rat who keeps a careful diet and watches his cholesterol.

Removing these barriers would encourage health insurance companies to begin experimenting with carrot and stick approaches to healthy lifestyles...

[We should] enable the residents of any state to purchase health insurance in any other state, under the laws and regulations of the state where the insurer is incorporated. This would create a nationwide market for health insurance, as President Bush has suggested. Making the U.S. a "health insurance free trade zone" would allow consumers to avoid unhealthy regulation and encourage states with anachronistic health insurance regulations to deregulate, or face the risk of health insurers reincorporating elsewhere.


While they are at it, they should create a "free trade zone" of medical licensure. Ultimately, the way to do that is to eliminate medical licensing and replace it with a reputation system.

It sometimes strikes me that the locus of power between states vs. the Federal Government is sometimes the reverse of what the Constitution intended, with Washington regulating things that have almost nothing to do with interstate commerce and states impeding trade with fifty-one regulatory fiefdoms, as is the case in health insurance.

For Discussion. What is the economic rationale for regulating health insurance or medical licensure at the state level?


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TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/166
The author at Telepocalypse in a related article titled Think local, act global writes:
    Take a quick look at this article by economist Arnold Kling. He suggests US healthcare regulation be altered so that the regulatory regime of service provision remains delegated to states. However, consumers can select a care plan from a provider... [Tracked on December 9, 2004 5:34 AM]
COMMENTS (8 to date)
Jon writes:

These authors provide nothing but ideology to support their position that deregulating health insurance would improve anyone's health.

They neglect to mention that their plan would effectively eliminate health insurance as anything but a "prepaid" medical plan. They would eliminate the "risk sharing" aspect of medical insurance.

If health insurers could use medical underwriting of groups, they just would refuse to renew one's policy once one developed a disease or exhibited any vulnerabilty.

Even if re-underwriting were forbidden, the insurers would just constantly offer new lower cost policies to healthy members of the groups and raise the prices on people who develop health problems that prevent them from leaving the groups, as already happens in some states.

If cost of healthcare were the driving force behind obesity and other bad health habits, we should expect that bad health habits would be more common in either people who can afford the medical expenses or are insulated from expenses by insurance. These problems are most prevelant in the groups that have the least access to insurance and the lowest ability to purchase medical treatment. Clearly education, genetics, and personality traits trump healthcare costs in these decisions.

Lawrance George Lux writes:

The real regulatory change which should be made at the Federal level is mandating health insurance to be a Contract between Insurer and Policyholder, so that the Policyholder determined what medical procedures he wanted his Insurance to cover. Insured could choose their own matrix of medical treatment--up to their yearly allotment, while Insurers could set rates according to the estimated yearly expenditures. lgl.

Taylor writes:

I don't think the authors have to explain that deregulation would "improve anybody's health," Jon. I think that we can assume tha in the long run, the enhanced competition will force all any inefficent insurance providers. Competition raises the bar, and I look favoribly upon anyone who forwards this policy.

Trapier writes:

You're correct, to a degree, Jon (1st comment). But you can't deny the current problem with insurance either. Perhaps the economic model of insuring health risk needs fundamental reconsidering, like Mr. Lux wisely suggests (2nd comment).

But even if we just connect some fiscal responsibility to coverage plans or HSA accounts...the competitive affect on medical production would drastically lower the costs of healthcare to that future sick person about whom you're worried.

~Trapper

www.isemmelweis.com

Jon writes:

The unstated policy question is to what extent do we want to spread the "risk" of bad health. One could adopt a policy position that the individual should bear the full cost of his or her health care or do without. The consequence of this would be a more "efficient" system; but people with readily treatable diseases would suffer death or permament disability if they lacked the financial resources, regardless if the reason was bad luck or bad decisions. The "efficient" system that these authors propose moving to would even impose this penalty on those who lose their coverage due to fraud by the insurer.

Most industrialized societies have opted for varying degrees of inefficiency as a price of avoiding such a social condition.

T-Bone writes:

Daily Health Policy Report

Opinion | States, Private Employers Likely To Monitor Effects of Minnesota Health Care Reform Plan, Op-Ed States
[Dec 09, 2004]
Minnesota Gov. Tim Pawlenty's (R) health care system reform plan is "a nationally important and unique public-private partnership -- the first such effort combining the market strength of all the main purchasers of health care in a state to push through needed reforms and improve the efficiency and quality of medical services," David Broder writes in a Washington Post column. The plan, called the Smart Buy Alliance, would "mobilize the purchasing power of three out of every five consumers in Minnesota to raise the quality, improve the efficiency and reduce the cost of health care" by pulling "together groups of purchasers ... at the local level," according to Broder. While "each bargaining unit will continue to negotiate its own contracts with hospitals, doctors and HMOs ... by setting uniform performance standards and reporting requirements, the alliance will empower its members to press for better coordination of treatment, more use of technology and fuller information to consumers about the results each hospital or doctors' group is achieving for its patients," Broder adds. In addition, Pawlenty's plan would allow residents to "set up health savings accounts" and "use market forces to seek more effective results in treating" chronic illnesses "that push up medical costs," Broder writes. In an interview, Pawlenty said the plan aims to harness "market forces, without a new government bureaucracy micromanaging what providers do," adding, "But at some point, I wouldn't mind seeing it morph into a [single] purchasing alliance." According to Broder, "the universality of the problem is what makes [the] experiment being launched in Minnesota" likely to "be watched carefully by other states and by private employers across the nation" (Broder, Washington Post, 12/9).

So, is anyone familar with this plan? Comments?

trapier.k.michael@vanderbilt.edu writes:

I'm not familiar with that Broder piece T-bone. But, to Jon I'd say, again, you're very right.

Perhaps the solution (gulp) is to promote wealth redistribution, but in a way that the government safety net still drives efficiency like a healthy person's HSA.

HSAs are so new though that this progressive discussion in not yet relevant. And if we forgoe efficiency for the net we may never be in a position to have both. Yet to such an ideal system, America is much closer than many other industrialized nations.

~Trapper

www.isemmelweis.com

Russ D writes:

Of course the gym rat will probably need medical attention for injuries more than the couch potato will, so the "healthy lifestyle" difference really isn't any difference at all when it comes to needing to go to the doctor. And of course the couch potato will probably die sooner, thus incurring costs for a shoter period of time than the gym rat.

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