Timm Herdt: Does This Insurance Market Work?

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Of the 1.4 million Californians who purchased health insurance this year through the Covered California purchasing exchange, 94 percent bought their plans from just four insurance carriers.

Outside of the purchasing exchange, in the private market for individual and small-business policies, about 80 percent of the market is controlled by the big four.

Such is not the kind of market that produces a great deal of competition.

“The health insurance market in California is what economists would describe as a naturally oligopolistic market,” says Insurance Commissioner Dave Jones. “There are very high natural barriers to entry. It takes a lot of capital and a lot of infrastructure. You’d have to be very, very big and have tremendous resources.”

The plain fact of life is that if a Californian wants to purchase an individual health insurance policy, he or she has four choices: Anthem Blue Cross, Blue Shield, Health Net or Kaiser Permanente. In some areas of the state, the choices might be slightly more, and in other areas slightly less.

“In a market like that,” Jones told me this week, “we typically choose to protect consumers. The producers of the service are price-setters, not price-takers.

“Talk to any small-business owner who purchases health insurance. There’s no negotiation that goes on. Basically, it’s take it or leave it. That’s the fundamental problem.”

And, putting aside the $57 million worth of deceptive, misleading and even outright false advertising against it, that is what Proposition 45 is all about.

Health insurance is a necessary product that all consumers have always needed and now are mandated by the government to buy. And there are essentially four companies that provide that product.

So, Proposition 45 asks: Does it make sense to have a government agency with trained accountants and actuaries review health insurance rates and determine whether they are justified, or should we trust four huge companies that have no fear of additional competition to set fair prices?

Forget all the noise you’re hearing on TV commercials (more on that later), and disregard those fear-mongering fliers you’ve received in your mailbox. To decide how to vote on Proposition 45, simply answer the question above.

It can be reasonably answered either way, depending on one’s level of trust in market-based economics, even in markets without classic competitive forces. But across the country, the dominant answer has been in favor of government intervention.

Thirty-five states — red states and blue — have decided that rate regulation of health insurance makes sense for consumers, just as rate regulation for electricity and natural gas providers makes sense.

In California, the Department of Insurance, headed by an independently elected commissioner, already regulates rates on every other line of insurance. One study estimates that the department’s rejection of excessive rate increases has saved California consumers $11 billion on auto insurance premiums since voters established rate regulation in 1988.

After more than a quarter-century of rate regulation, California has a robust, competitive auto insurance market, which is certain evidence that the permissible rates provide for sufficient profit.

Now, about those Proposition 45 commercials…

You’ve probably heard of the “independent commission” that now regulates health insurance pricing rather than “a single politician.” That “commission” is never named, because it doesn’t exist.

The reference is likely to the five-member board of directors of Covered California. Three of them are appointed by a single politician, the governor. And although that board can negotiate, it cannot dictate rates. Even with the massive insurance marketplace it controls, Covered California is a price-taker.

Perhaps you’ve also heard the commercial in which a man says he doesn’t want a “single politician” making decisions about his health insurance deductibles and copays.

It is bunk.

If Proposition 45 passes, decisions about benefits would be entirely out of the insurance commissioner’s purview. Department of Insurance regulators would obviously have to factor in deductibles and copays in order to make actuarially sound decisions, but they could regulate only the price.

Despite the massive No on Proposition 45 campaign, funded almost exclusively by Kaiser, Wellpoint, Blue Shield and Health Net, polls show that the initiative, while down, is not quite yet out.

Some voters may be watching all those commercials and asking a logical question: If health insurance rates are already fair, why are these insurance companies spending so much to prevent a government agency from independently determining whether those rates are fair?

It seems a reasonable question.

And Jones points out one other thing about that $57 million from the perspective of policyholders: “It’s our money.”

Timm Herdt writes from Sacramento for The Star. His political blog “95 percent accurate” is at http://www.TimmHerdt.com

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