The essential purpose of a competitive free market is to match a willing seller of a good or service with a willing purchaser. President Barack Obama maintains that the market for health insurance is not competitive and that the creation of a health insurance exchange accessible by individuals and employers will increase competition. Obama has stated, “If you don’t have health insurance, or are a small business looking to cover your employees, you’ll be able to choose a quality, affordable health plan through a health insurance exchange – a marketplace that promotes choice and competition.” White House Press Office, July 22, 2009. He further asserts that the Federal government will not take over the market for health insurance: “This is not about putting the government in charge of your health insurance…” Fox News, August 11, 2009.
President Obama declares that the market for health insurance is not competitive and that the Health Insurance Exchange proposed in the major House Bill, HR 3200, will increase competition in the market. (Review HR3200 here.) If the President is correct, HR3200, at least insofar as the Health Insurance Exchange is concerned, would be a positive development for liberty as it will release the market from anti-competitive shackles. But is he right?
Whether or not the health insurance market is competitive is worth examination. Even if it is not as competitive as it could or should be, however, the Federal Health Insurance Exchange contemplated by HR3200 just adds fuel to the anti-competitive fire rather than extinguish it.
To increase competition in a market for any product or service, it seems axiomatic that the market must either have new competitors enter the market or new products offered by existing competitors. Approximately 1300 insurers compete in the health insurance market. Think about that. If a market has 1300 competitors, we should expect fierce competition for consumers. The market should become more and more specialized with competitors seeking out more and more specialized niches, providing a broad variety of products at competitive prices. Just look at the cereal aisle in your supermarket. The cereal market has fewer competitors than the health insurance market. Yet there is a broad variety of products across an incredible range of prices. So why don’t we see the same thing in the health insurance market?
This may surprise many, but I agree with President Obama that the health insurance market is not competitive. I just disagree with him as to the cause. The President lays the blame at the feet of the insurers, always an easy target for a demagogue, but does not ever really explain how the insurers have managed to corral the market in what would have to be the most effective cartel ever conceived by the mind of man. I am not an economic historian (I leave that to my daughter!), but I feel reasonably confident in opining that a 1300 member cartel is not, and never has been, possible!
A full exposition of the competitive issues in the health insurance marketplace is beyond the scope of this discussion. Nevertheless, I offer one salient factor. Government. The health insurance market is already heavily dominated by government regulations and mandates. The insurance industry is heavily regulated in all respects by state governments and some of those regulations are essential to assure the financial health and integrity of insurers. The government involvement in health insurance, however, goes far beyond standard insurance regulations. States have taken significant steps to dictate precisely what must be covered under health insurance policies sold in the state, effectively eliminating the diversity of products that a free market would produce, raising the costs and prices associated with the products, and reducing the competitors willing to assume those costs in the market.
The Council for Affordable Health Insurance produced a review at the end of 2008 of the various state mandates for health insurance and their impact on health insurance costs. According to its study, Health Insurance Mandates in the States 2008, the mandated coverages required range from 64 and 63 specific requirements in Minnesota and my own “Free” State of Maryland, to 15 in Indiana. The Council analyzed the impact of these mandates on the market for health insurance at page 2 of its report as follows:
Because mandates require insurers to pay for care consumers previously funded out of their own pockets. We estimate that mandated benefits currently increase the cost of basic health coverage from a little less than 20% to more than 50% depending on the state and its mandates. Mandating benefits is like saying to someone in the market for a new car, if you can’t afford a Cadillac loaded with options, you have to walk. Having that Cadillac would be nice, as would having a health insurance policy that covers everything you might want. But drivers with less money can find many other affordable car options; whereas when the price of health insurance soars, few other options exist.
Although President Obama may have undercut the Cadillac analogy somewhat by his seizure of General Motors, the reality is that state governments have already driven competition from the health insurance market by reducing product variety, reducing competitors on a state-by-state basis, and increasing costs. The results have been to reduce the supply and increase the prices; the goal of most cartels, but here they have been created by government at the state level.
If the Federal Health Insurance Exchange would break the anti-competitive effect of state mandates and regulations, I would applaud loudly. Unfortunately, HR3200 fails to deliver. Starting with §102, the Bill requires that after certain grace periods, effectively all health benefit plans have to be qualified health benefit plans within the Exchange. For a plan or insurer to be able to participate in the Exchange, and they effectively cannot sell their policies if they do not, §204 requires that they must contract with the Orwellian-named Health Choices Commissioner. This “contract” is not a contract in the usual sense of the term, as the terms are dictated by the Commissioner. The Commissioner holds all of the leverage.
We probably could stop there, because if the government effectively requires participation in the Exchange in order to do business, and decides who can be in the Exchange, I submit that contrary to what the President has said, HR3200 is “about putting the government in charge of your health insurance.” The government controls the market and decides who can participate. That really ends the question.
But the anti-competitive aspects continue. §203 mandates that participating insurers may offer only four levels of benefit coverages. A compilation of the benefits that must be provided under the mandated levels is not easily accomplished as they are sprinkled throughout the Bill. It is sufficent to note that the requirements incorporate the state mandates mentioned above and go further. For a good discussion on the requirements, go to the Foundation for Economic Education. §131 further gives the Commissioner control over marketing by the plans.
I could go on and on. For example, I have not even touched the implication of adding a public option in the Exchange. But I think you get the picture. Unlike the phantom health insurance cartel decried by the President, the Health Insurance Exchange is a real cartel, with the government controlling the participants, the virtually uniform products they can offer, how they market their products, and what they can charge for them. For the President to assert that this represents freedom and competition, he must be either completely disingenuous, or ignorant about the concepts of freedom and competition. Sadly, I fear that he is both of those.
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