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Let’s make health insurance easier with interstate market

Peter Crabb: The Economy
Peter Crabb: The Economy

It’s not getting any easier.

The Patient Protection and Affordable Care Act led to a significant drop in the number of people without health insurance. That doesn’t mean, however, that it is easy to find coverage.

Idaho has only five companies selling insurance for individuals on its exchange, according to HealthCare.gov. Just this past month, Tennessee’s largest health insurer, BlueCross BlueShield of Tennessee, announced it was dropping coverage for about 130,000 people enrolled through that state’s exchange.

Insurance firms are getting out, or staying away entirely, from the state-run exchanges despite receiving approval for higher premium charges. The Idaho Department of Insurance approved a 24 percent increase for individual and small group plans in 2017.

Economic theory and evidence explain both these unfavorable market outcomes. Only greater competition in the health insurance market will increase services and hold prices down.

In any competitive market, suppliers have to keep prices low and offer quality service to survive and prosper. When there are barriers to entry, however, there is little competition and little incentive to provide good service.

The current legal restrictions on how Idahoans purchase health insurance, or any state’s residents for that matter, reduce the consumer benefits of competition.

Under current law, insurance companies must set up separate firms with different policy offerings in each of our 50 United States. Interstate competition has improved efficiency and raised consumer value for many different types of products, but consumers of health insurance have been denied these gains.

Economic theory also explains why firms like Blue Cross in Tennessee no longer want to participate in the individual insurance market. Health care insurance is subject to an incentive problem called adverse selection, or the tendency for only the really sick to buy coverage.

The Affordable Care Act was supposed to mitigate this problem by mandating that everyone be required to buy health insurance, but adverse selection is harder to overcome when markets are segregated. Insurance firms can more easily spread the risks of adverse selection when they can sell insurance in multiple locations.

There’s not need for state-run health insurance exchanges. We would all be better off buying health insurance the same way we buy life or auto insurance. Things will only get easier in this market when it becomes a national market.

Editor’s note: This column was corrected Oct. 28 to reduce the number of people being dropped from covered by BlueCross BlueShield of Tennessee and to reflec that the company still participates in Tennessee’s small-group insurance market.

Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa. prcrabb@nnu.edu

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