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Research : does Competition benefit health insurance subscribers?

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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

How does competition work in the health insurance market? Do more competitors in a market area — say, a state — invariably mean a better deal for the insured?

These questions are germane as regulators are busy implementing the Affordable Care Act , which imposes a series of stringent new regulations on the market for health insurance, particularly the market for small-group or individually purchased insurance.

After months of hard work, for example, the National Association of Insurance Commissioners on Oct. 21 submitted to Kathleen Sebelius, the secretary of health and human services, its recommendations for defining the minimum loss ratio that health insurers must meet as of Jan. 1.

As I noted in two earlier posts on the ratio, it expresses what portion of the premiums collected by insurers must be paid out in the form of “medical benefits.” For insurance sold in the small-group or individual insurance market, the portion must be at least 80 percent. For insurance sold in the large-group market it must be at least 85 percent.

One can debate whether, with properly conducted health insurance exchanges, this regulation of the minimum-loss ratio was actually necessary. I think not, because if both the benefits and the premium for them are clearly stated, I can comparison-shop. It’s not important for me to know how insurers allocate the premium.

But if it were to be imposed, it should have been phased in gradually, over, say, four years or so, as was done with the Medicare prospective payment system for hospitals introduced under the Reagan administration in the mid-1980s and the Medicare physician-fee schedule introduced by the George H.W. Bush administration in the early 1990s.

If major changes in the health system are imposed rapidly, they tend to generate untoward and sometimes unanticipated side effects that must then be addressed with ad-hoc waivers or other adjustments, such as the esoteric “credibility adjustment” of the minimum-loss ratio, whose details most readers of this blog probably wish to be spared.

Now that the regulation is on the books, one wonders what impact it will have on the number of insurers competing in the market and what effect their numbers will have on the insured.

In a letter submitted to the insurance commissioners in May, the Council for Affordable Health Insurance reminded the commissioners that these states’ traditional “standards for individual-market loss ratios vary between 55 to 65 percent, depending on the type of plan.” The council, as well as the American Health Insurance Plans, argues that the effect of the regulation will be to drive many small insurers from the market and thus to reduce competition for health insurance.

Source : New York Times