Tuesday, November 21, 2017
Opinion

Hiring and firing health insurers

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When Mitt Romney said "I like to be able to fire people who provide services to me," rivals and pundits seized upon this seemingly crass comment and the evident glee with which it was uttered. Footage of this gaffe will roll again and again.

But Romney was actually explaining how important it is for all of us to be able to switch health insurance providers if we can find better service or lower price. This "hiring and firing" is key to competitive efficiency. In a competitive market, buyers can shop around and switch to a better seller, a process familiar to those with cellphones, cars, in restaurants, etc. When consumers can choose among sellers on the basis of price and quality, it forces sellers to compete by offering good quality at a price in line with other sellers and without excessive profits.

COMPETITION. Does the market for health insurance provide such an opportunity to hire and fire? The simple answer is no. The services of a health insurer aren't needed until an injury or illness occurs; at that point, choice is severely limited. Consumers will find that their "pre-existing condition" will deter a new insurer from covering that ailment — if they are willing to issue a policy at all.

Choice is further limited for many workers because their health insurance is part of a compensation package tied to their employment. Usually their employers approve just one or two providers. Moreover, in many states, the health insurance markets are highly concentrated, so the prerequisite for competition — many sellers from which to choose — is nonexistent. Firing an insurance provider is not an option if there are no competitors to hire.

Even where there are plenty of insurers, competition in insurance markets presents another problem: The hiring/firing process forces insurers to charge "experience-rated" premiums. That is, they charge higher premiums for those likely to cost the company more money.

Experience rating is most familiar in automobile insurance: Drivers likely to cost the company more — those with an accident history, speeding tickets, or DUI infractions — will be charged higher premiums or, if their record is bad enough, simply be denied coverage. It is easy to see why insurance companies will charge experience-rated premiums — imagine if they didn't.

If insurers did not charge high-cost drivers more, they would have to recoup their costs by raising rates on lower-cost drivers. Next, competing insurance companies would offer the lower-cost drivers a lower premium, thus encouraging them to fire their current provider and hire their firm. This process of hiring and firing results in experience rating: higher rates for high-cost drivers and lower rates for low-cost drivers

While it is perfectly acceptable that high-cost drivers pay higher premiums for car insurance, charging higher health insurance premiums for sick people is not. While the road system is designed for the cautious driver, the health care system is designed to help sick people and to prevent healthy people from becoming sick. To insure sick people the same way we insure drunk drivers is perverse.

INSURANCE EXCHANGES. Both the Massachusetts Health Care Plan, enacted when Mitt Romney was governor, and the Affordable Care Act, signed into law by President Barack Obama, require that health insurance be sold in regulated exchanges. The purpose of these exchanges is to protect those in need of health insurance against the natural tendency of unregulated competitive firms to charge experience-based premiums. To have access to the market, insurers must agree not to deny coverage for pre-existing conditions or to raise premiums to unreasonable levels when people get sick. Within the exchanges, citizens can hire and fire companies based on the way they provide the regulated insurance services; they can fire the company that provides poor service, but the company cannot fire the person who gets sick.

Charles O. Kroncke, far left, is associate dean in the University of South Florida College of Business. William L. Holahan chairs the department of economics at the University of Wisconsin-Milwaukee.

 
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