Tuesday, September 14, 2010

Why selling health insurance across state lines won't impact health care pricing

Several of CNBC's news anchors advocate selling insurance across state lines to lower health insurance premiums. This is another instance of people attempting to use traditional economic theory to address the issues in health care and in doing so misleading anyone that believes them.

Thirty years ago before managed care made its impact on the industry, hundreds of insurance companies sold insurance products all over the country by licensing their policies in nearly every state. Today, most states are dominated by a few insurance carriers. Often the top 3-4 carriers have over 85% market share if you exclude individuals covered under government health care programs.

Why did this happen? Simply stated market share dominance is the key to provider discounts. A health care provider typically provides health insurance carriers discounts as a means to "channel" patients to their practice or facility. The more "channeling" power the insurance carrier has the greater the discount.

Therefore, large market share health insurance carriers enjoy a discount greater than their competitors. In addition, they have broader networks and are better able to "manage care" within those networks because they can spread the cost of these activities over a larger base of policyholders.

As a result, carriers with small market shares cannot compete regardless of how large their market share is in other markets because many health care providers are local (especially the physicans) and therefore local marketshare is the only thing that matters to them.

Therefore, small market share carriers cannot compete on the cost of claims. The only way small market share carriers can compete is through "no claims" underwriting. In other words using very stringent underwriting standards to exclude offering insurance to anyone that might file a claim. In other words, out of state carriers could "cream" the market of healthy individuals leaving the sick for the other carriers to insure. In addition, small market share carriers are effectively locked out of the "larger group" insurance market since they could not control underwriting with this group.

This results in outrage by the citizens of a state that find as they grow older they are unable to secure insurance as individuals. In the end, this strategy is a failure and the conservatives advocating it should drop it and move on. It just makes them sound ignorant.

How can you introduce competition in health care? The best way would be for the state to mandate that individuals or insurance carriers be able to rent any health care carrier's network. In other words, the large insurance carriers would be required to rent that networks like a utility (like telephone companies do today). The rental rates for these networks would be overseen by a regulatory body like the insurance commission or CMS (Medicare).

Now you have competition by individuals themselves, who may opt to self insure some amount of their care and contract for catastrophic health insurance. In addition, under this scenario interstate competition could work.

Administratively, the large networks would submit their contract rates to large electronic claim exchanges (these exist today) and claims would be repriced by these exchanges and sent to the carriers.

Now you have competition!

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