Competition is just what the doctor ordered for the nation’s problem of rising health care costs. But no one is bothering to fill the prescription.
On Feb. 13, President Obama sent a new federal budget plan to Congress. The plan calls for higher spending next year, but also tries to reduce the government’s over the next decade. Even so, the plan does little to address the major cause of future deficits — health benefit programs.
Even after passage of the Patient Protection and Affordable Care Act, federal health expenditures are expected to rise fast. This outcome is due in large part to a lack of competition in the health insurance market.
While there are many factors leading to the rising costs of health care, the restrictions on where individuals can purchase health insurance or businesses can buy plans for their employers, is the easiest problem to fix.
Probably the most-talked-about issue in the Idaho Legislature this year is the question of whether or not Idaho should create its own health insurance exchange, as now mandated, or wait for the imposition of a federal structured plan. State policymakers from both parties support a draft plan for an Idaho-run exchange written by the state Department of Insurance.
Arguing in favor of the state plan, Department of Insurance Director Bill Deal says that if we wait for a federal exchange Idaho-based insurance companies and insurance agents may be left out. This is to say that the department’s plan is necessary to protect Idaho-based companies from competition.
But competition is just what the market needs.
Under the Patient Protection and Affordable Care Act, all 50 states will be allowed to set up their own plans. This allows for continued protection from competition for health insurers. All other insurance markets operate differently.
You don’t hear too many people complaining about the cost of auto insurance. Life insurance also is relatively easy to find and buy. The reason is that many firms compete in these insurance markets across the entire nation.
A competitive market is one in which there are so many buyers and so many sellers that each has a negligible impact on the market price. The first requirement for many buyers is clearly met — most everyone wants health insurance. Opening up the health insurance market to interstate competition will allow all these buyers to choose from more companies, resulting in lower prices and improved service.
As health insurance continues to rise, it causes more and more healthy people to opt out of the market. The product is too expensive relative to the amount of health care they consume.
This means that the pool of the insured becomes older and sicker. Prices go higher still as this group consumes more care. This leads to even more healthy people opting out. Economists call this an “adverse selection death spiral.”
The Patient Protection and Affordable Care Act attempts to address this problem with the insurance mandate. But there is an easier way: let consumers buy plans from where they want for what they want.
Interstate competition has improved efficiency and raised consumer value in many different markets. Unfortunately, consumers of health insurance have been denied these gains.
Idaho policymakers should fill the prescription for interstate competition.
PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa