The problem with creating a competitive insurance marketplace

A lack of competition among health insurance providers can cause problems, including high and rising insurance premiums. Some people have thought to remedy this by allowing consumers to buy health insurance across state lines. The principal argument in favor of interstate competition is that it will encourage states to reduce unnecessary state-level insurance regulation. Undue regulatory burdens in, say, Illinois may lead residents there to buy coverage from an insurer in Iowa or Texas.

“There are serious regulator barriers in the insurance market, but this solution is unlikely to do much to lower costs,” said Michael Morrisey, PhD, professor and head of the Department of Health Policy and Management at the Texas A&M School of Public Health. “The problem is that today’s health insurers don’t look like they did 30 years ago.” Then most insurers covered most physicians and hospitals and paid providers at billed charges or negotiated costs. Today, virtually all insurers have networks of physicians, hospitals and other providers. Preferred provider organizations (PPOs) have relatively broad networks, while health maintenance organizations (HMOs) have smaller networks.

“The networks came into being to enhance insurer competition,” Morrisey said. By negotiating lower prices with a limited number of local doctors and hospitals, a new insurer could charge lower premiums than the dominant insurer and gain more subscribers.

“Today, the key to insurance competition is the ability to establish a network of providers at prices the insurer believes will allow it to successfully compete with other insurers,” Morrisey said. “These markets are local. So, changes in regulation in Illinois is all well and good, but unless an insurer from Iowa or Texas can negotiate a price-effective network in Illinois it won’t enter the state.”

The localness of these markets is key for another reason, as well. If there is only one hospital in Midland, Texas, for example, it may be very difficult for an insurer to get lower prices: There’s no one nearby to provide alternative sources of care. Perhaps surprisingly, this local competition matters in big cities too. “In our study of insurance in five states, we found that insurance competition was very difference in San Francisco than in Los Angeles,” Morrisey said. “The problem is that there are many fewer hospital systems in the Bay Area than in Southern California. Insurers can negotiate in the Los Angeles area, but it’s much harder in San Francisco. Closer to home, one insurer told us, ‘We were able to put together a great network in Houston, but we just couldn’t get one to work in Dallas.’”

“Affordability of health insurance is key to protecting people’s access to care and financial well-being,” Morrisey added. “Encouraging interstate insurance competition is unlikely to do much to rein in costs. Enhancing the ability of insurers to negotiate local networks, however, would help.”