Arnold Kling  

Exit, Voice, and Health Insurance

Readings on the Financial Cris... The Libertarian, the Conservat...

Here are my thoughts on the role of reputation in health insurance markets, a topic that Bryan has raised.

I think that reputation matters when exit matters. That is, if people will switch suppliers based on word of mouth, then reputation will be important.

In health insurance, consumer exit is inhibited, for at least three reasons.

1. Most people get their health insurance from an employer. The individual cannot switch companies. The most the individual can do is voice complaints (about non-payment of claims for example) to their human resources department, and hope that the human resources people use the threat of exit to change the insurance company's behavior.

2. Turning to the individual health insurance market: In many states, such as Maryland where I live, there are not enough suppliers to have meaningful competition and opportunities for exit. The state regulations for "community rating," "must-carry" and mandated coverage have driven most companies away. The state regulations make premiums so high that few individuals can afford coverage and so not many firms can get enough business to bother offering health insurance in these states.

3. The insurance industry does not have a solution for the pre-existing condition problem, so many people face lock-in. If John Cochrane's idea of health status insurance were implemented, that would address the problem of lock-in.

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COMMENTS (5 to date)
William Newman writes:

I'm not sure how strong point #1 is. As I understand it, health care insurance provided by US employers today is a choice by the employers in order to attract employees, very much like raising wages. It's a tax- and regulatory-"favored" choice, sure, but as far as I know the favors are not subsidies or other payback, but instead reduced obstacles (esp. bypassing income tax, secondarily insurance pooling issues and stuff) relative to individuals paying for care directly, and relative to individuals buying insurance with their after-tax salary. Thus, to the extent that the insurance is perceived as lousy by the employees, it will do the employer no good. (As opposed to a policy where employers get other kinds of favors conditional on health insurance, e.g., zoning favors or immigration favors.)

So if the payoff to employers is almost entirely through how the employees react to the insurance, it seems to me that reputational incentives would tend to be strong. Certainly having the reputational issues go through two layers of agents, employer and employee, makes the reputational incentives more complicated. But it's not clear to me that this makes the reputational incentives weaker.

Geoffrey writes:

Companies switch insurance providers all the time. Usually to keep the employees happy. if anything it increases the importance of reputation. The HR departments (or person for smaller companies) are more knowledgeable on what the competition has to offer.

Dano writes:

Is health status insurance the equivalent of a credit default swap? Or is it just a reinsurance policy?

Justin Ross writes:

Regarding #3, about a year ago I read of a Michigan company that was selling insurance exclusively to people with pre-existing conditions.

Dr. T writes:

"Most people get their health insurance from an employer. The individual cannot switch companies."

I've held numerous jobs in four states, and I've never had fewer than five health insurance choices. I'm sure that some companies offer only one health insurance choice, but that isn't the norm. Most workers can switch insurers.

In workplaces with only one health insurance plan, enough bad experiences will usually get management to switch insurers, because many of the managers use the insurance and because the benefits office gets swamped with all the complaints. It also makes it hard to recruit when current employees say, "No, we don't have health insurance, we have hell insurance."

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