Regulatory Reform

The United States is currently absorbed in a national debate on whether, how and to what degree the current way that healthcare is provided to the people of this country should be changed. While words like ‘public option’, ‘individual mandate’ and ‘national insurance exchange’ are bandied about in the nation’s capital and town halls across the nation, those in power seem to forget the primary issues confronting them: that 46.3 million individuals lack health insurance because it costs too much, and that the price of health insurance coverage is so high because the market for health insurance is not competitive.

Competition among health insurance companies is currently being strangled by the way health insurance companies are regulated. Every state has its own regulatory code applying to the sale of health insurance. Any company wishing to sell health insurance in a given state must offer consumers a plan that conforms to that state’s regulations and be certified by the state’s regulatory body.

Thus, any company wishing to sell insurance on a national scale must offer fifty versions of each plan: one for each state’s population. The administrative costs of a company that attempted to do this would sky-rocket — and indeed, 31 percent of all healthcare spending in the private sector is administrative. Because the cost of offering health insurance plans in multiple states is so high, insurance companies choose only to offer insurance in one or a few states. The result of this is a lack of competition in each state’s market for health insurance — and, according to Professor Monika Lopez-Anuarbe, the economics Department’s expert on health economics, “thirty-four states have such a concentrated health insurance industry that two to three companies dominate over 75 percent of the population in those states”.

In these states, consumers have almost no choice regarding from whom they can buy insurance. This allows companies to hike prices without fear of losing their customers; and, since all the companies selling insurance in a given state can very easily collude to raise prices, health insurance for many has become unaffordable, forcing people to go without it.

And because health insurers can raise prices without the threat of losing their market share, they have little reason to cut their costs — if their profits go down, they can always just jack up their premiums.

To solve this problem, Congress should create a system of rules governing all health insurance sold across the nation to replace the fragmented state-based system of regulation. Congress could pick and choose which of the regulations currently in place in many states to include under this system — the most important issue is not what these regulations are, but whether they are implemented uniformly on a national scale.

Implementing these national rules, and legislating out of existence the authority of the states to choose who can and can’t sell insurance within their borders, will open the health insurance market to competition as every company currently able to sell insurance in only one or a few states is able to sell it in every state. This competition will force insurers to lower their prices to attract more customers; then, as prices drop nationwide, insurers will be forced to find new ways to cut their costs in order to continue making a profit or go out of business.

Competition will cut healthcare costs in the private sector across the board, and leave those companies that have the lowest costs with the largest market share.

The issue of the lack of coverage for so many Americans can be traced to the high costs of health insurance, and the surge in these costs over the past three decades can be traced to the lack of competition in health insurance markets.

Tearing down the barriers to a national health insurance market will open health insurers to competition, creating a race among insurers to cut costs in order to offer a lower price for their insurance coverage.

It is not the private sector itself, but rather the strangulation of competition in the private sector, that has made healthcare in the United States the complicated mess that it is today.