law-of-freedom

Problems We Face

(1) Problems for consumers:  (a) lack of competition in current system, making prices higher than otherwise; (b) difficulty comparison shopping due to a wide variety of plans offered.

(2) Problems for government: (a) liability for government of running a gigantic insurance company, if they start a public option (Medicare already has an unfunded liability in the trillions - imagine if eligibility is extended to the whole population!); (b) since every company can have such differences in underwriting standards, ratemaking, and loss experience, it is difficult for regulators to determine whether or not the premiums being charged are reasonable.

(3) Problems for private insurers: (a) New, small insurers can't compete against bigger insurers; (b) bigger insurers face an unlevel playing field themselves if the government forms its own plan.  Medicare's unfunded liability is due to government's tendency to underestimate costs, so it is reasonable to expect that government will charge inadequate premiums and consumers will flock from the private insurers to the underpriced public plan.

Solution:

A ratemaking bureau for health insurance, structured similarly to the National Council for Compensation Insurance, which was formed in 1922 to standardize ratemaking for worker's compensation insurance.

Here is how the ratemaking bureau would solve the problems listed above:

(1a) A major impediment to competition in insurance markets is that small new insurers have no loss experience on which to base rates.  If the loss experience of all current companies is submitted to the rating bureau, standard rates can be set that will be available to all companies.

(1b) The bureau would standardize rates based on a few variables that most accurately predict costs.  Insurance companies would only be permitted to vary premiums based on those variables, company expenses, and profit provisions.  This would make comparison shopping much easier.

(2a) To set adequate rates, the public option itself would require an analysis of loss experience.  Otherwise, we can expect unfunded liabilities in the trillions, like Medicare currently has:  see pages 66-68 of the 2009 Medicare Trustees Report.  Therefore, the work of a ratemaking bureau would be required anyway.  There is no better way to get comprehensive data than to require all insurers to submit their loss experience.

(2b) The standardization of rates on a few key variables will help regulators determine whether or not premiums are reasonable.

(3a) See (1a)

(3b) A ratemaking bureau, by assisting in opening up the markets for competition, could remove the need for a public option.  If a public option was created, it would be required, just like other companies, to base its rates on the bureau's rates, thereby insuring a fair playing field.