A Response to Jonathan Cohn: Healthy Choice

August 23, 2005 • Commentary

In last week’s TRB, Jonathan Cohn takes aim at one of the most innovative health policy proposals in recent memory: the Health Care Choice Act, a bill sponsored by Representative John Shadegg of Arizona. Currently, if you buy health insurance you are allowed only to buy a policy licensed within the state where you live. Shadegg’s bill would allow you to buy a policy from anywhere in the country.

States require health insurers to obtain licenses before they can do business in the state. The most basic licensing requirements include such things as solvency standards. But each state also requires health insurers to provide certain types of coverage, to cover certain categories of people, or to price coverage however the state thinks is best. Idaho has passed the fewest such laws (13) and Minnesota the most (60).

Cohn concedes that “some state rules … really do seem dubious–or, at least, suspiciously likely to benefit certain well‐​connected groups of health care providers.” Those would include requirements that insurers provide–and that consumers purchase–coverage for hair pieces (7 states), dieticians (4), marriage therapists (11), massage therapists (4), and … well, you get the picture. At a time when the biggest health policy concern is the number of Americans without coverage, these laws make coverage more expensive by requiring people to purchase coverage they do not want.

Shadegg’s bill would allow individuals to avoid the cost of unwanted regulations by purchasing insurance from any carrier in the country, with the coverage subject to the rules of the licensing state. Cohn objects because some regulations are intended to expand coverage, such as laws that increase the cost of coverage for healthy people in order to reduce premiums for less healthy people. If healthy people can choose insurance from a state that doesn’t charge that mark‐​up, he argues, those laws won’t work. That’s also the accepted wisdom among health policy analysts.

The problem is that those laws don’t work anyway. Mark Pauly of the University of Pennsylvania has made some fairly surprising discoveries about individual and employment‐​based health insurance. For example, the data show that insurers don’t adjust health insurance premiums for risk very much in either market. Moreover, he has also found that the type of laws Cohn defends actually “slightly reduce the total number of people buying insurance.” In other words, healthy people know that they’re being charged more than they cost to insure, and thus choose to join the ranks of the uninsured. Talk about a race to the bottom.

In fact, the Shadegg bill could succeed where those laws have failed. Many high‐​risk consumers would certainly appreciate the option of lowering their premiums by declining coverage they don’t need. (Should teetotalers really be required to purchase coverage for alcoholism treatment, as they are in 44 states?) Moreover, Pauly and his colleagues find that administrative costs account for most of the price difference between the individual and employer markets. Those reach 30 to 40 percent of premiums in the individual market, but only 5 to 25 percent in the employer market. Giving people the choice of purchasing coverage from anywhere in the country would allow even the not‐​so‐​healthy to seek out carriers who hold down that administrative mark‐​up, perhaps through a higher volume of individual sales or sales to large groups (churches, etc.). The point is that it is entirely possible that expanding choice could provide more security than laws limiting choice, even for the intended beneficiaries of those laws.

In essence, health insurance regulation is a product. We pay government to ensure, among other things, that carriers actually pay our hospital bills. When we see regulation this way, it should come as no surprise that we are likely to see quality improvements and cost savings once its producers (states) are forced to be competitors, rather than indulged as monopolists. Not only that, but the quality and price of related products (the coverage itself) would improve in an environment that is more competitive and more open to innovation. Given all this, who wouldn’t favor choice?

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