Health Insurance And The Problem Of Compliance Costs

I've been following the discussions of health care and health insurance reform. One possible reform that's being discussed is opening up the market for insurance policies across state lines. Overall I think this is a good idea, but the devil is in the details. I believe it is possible that, done wrong, this could create a health care nightmare instead of a free market paradise.

The problem with allowing health insurance to be bought across state lines is one of transaction costs. You think it's confusing now when your doctor's office has to find out what your insurance plan does and does not cover? You think it's expensive now when a private medical practice has to hire half a dozen people just to bill insurance? Think how it'd be if your doctor's office had to know what 1300 different insurance companies' various products covered. The high cost of keeping up with paperwork from so many insurance companies is, in my opinion, the most cogent argument in favor of a single payer system. To keep costs down, doctors will probably do what they already do-- only accept certain insurance policies to keep down their billing costs. It's a rational choice, but this would work against a free market in insurance.

Let me explain. If the health insurance market were merely opened overnight, sure you could now go on the internet and buy a policy from a firm in, say, Kansas. But when you need to go to the doctor, you'd find that your Utah doctor's office hasn't heard of this obscure Kansas company and doesn't accept their insurance. All of a sudden you have an access problem: you might as well not have had insurance at all, and you're probably locked in to your policy for some extended period of time to boot. This is not a good thing. Now in theory when you were buying this policy from Kansas, you might have bothered to check whether your favorite doctor accepted this insurance. Theory and reality are two entirely different things. Sooner or later, of course, you'd just get a new policy and this time you'd check, and the free market will have done its job. But we have to remember that Average Joe is still leery of this free market insurance stuff, and incidents like this will serve to put him off it. He'll hear a horror story about how somebody died because they were on the phone trying to find out if this ER took their insurance, and even if it was their own damn fault for trying to work out the billing before going to the ER in a life-threatening emergency, it'll still serve as ammunition against a free market in insurance. And then there's the problem that Average Joe doesn't have large amounts of free time just begging to be spent researching various health insurance plans. Average Joe probably would prefer to spend his free time riding ATVs with his family or catching the game on TV or doing whatever he does to relax. Like most of us he'd probably resent having to look for another insurance plan. Simmering resentment is not a good thing; it tends to boil over unexpectedly.

Eventually, if allowed, the insurance market would sort itself out. A software product might be developed to aid insurance billing. An exchange might be created to help Average Joe find a good plan for him with little effort. Smaller companies with niche products might be bought up by larger companies. But all this would take years, and likely it would not be allowed to sort itself out. Confusion and Delay, the cardinal sins of the Island of Sodor, would serve to turn public opinion against free-market health reforms. In no time at all, people would be clamoring for change-- demanding that health providers be forced to accept all plans, etc. Over the long term, people might become averse to buying policies across state lines, which rather defeats the purpose of opening up the market. And it would tend to funnel the interstate insurance business toward a small number of large companies, which is one of the arguments against the House bill's proposed insurance exchange, even if it's not the main argument against it.

I think the best way to go about it would be to make sure the infrastructure to support all this insurance billing is in place before opening up the floodgates. If the federal government can work with the insurance companies to, say, create at least one billing software product that can make billing 1300 insurance companies practical for doctor's offices, or give the smaller companies time to join with other small companies to negotiate mutual provider networks and standardize their products, that would make the transition to a free insurance market a lot easier.

I firmly believe that this can be done, and if it's done right the American public will immediately be sold on the liberties and virtues of the free market. But if it's done wrong, we may end up selling socialism.