Monday, August 10, 2009

Should insurance premiums be equalized?

The Wandering Tax Pro Robert Flach writes:

I do not want “socialized medicine”, nor do I want a new Medicare-like government run regime. What I do want is for insurance premiums to be “equalized” throughout the US so that I do not pay more in NJ for the same coverage than someone in the same situation in Kansas

Without "socialized medicine," equalization is not going to happen. In a free market system, insurance companies, just like any other businesses, are going to charge different prices in different places because their costs of doing business are different in different places--for all kinds of reasons.

To take just one kind of reason, if houses, groceries, or heating oil cost more in NJ than in Kansas, then physician and other health care provider salaries will be higher in NJ, which in turn means health care costs will be higher in NJ.

To take another kind of reason, Atul Gawande has written that the efficiency of the health care delivery system is much greater in some places than in other places. I don't know about Kansas, but it appears that Minnesota uses expensive medical procedures much less frequently than other places, with no apparent adverse effects on health outcomes.

Medicare, a government insurance system, can charge the same premium everywhere, because they are under no obligation to deliver a profit, or even to break even.

Private for-profit companies are obligated to maximize shareholder profits. If the costs of doing business in NJ are higher than the revenue from those "equalized premiums," then private insurance companies owe it to their shareholders to refrain from operating in New Jersey.

Even private non-profits are obligated to break-even. Under the "equalized premium" system proposed by the Wandering Tax Pro, thrifty Kansas or Minnesota citizens would have an incentive to start up their own non-profit health care coop insurance company in their states, so they don't have to pay premiums that reflect the high costs of doing business in those other states. In a private system, why should Kansans pay for the high housing costs of New Jersey doctors? In a private system, why should Minnesotans pay for the more expensive interventions prescribed by New Jersey doctors?

Anyone who wants equalized premiums everywhere effectively wants socialism, whether they realize it or not.

A private system will not deliver equalized premiums.

And, to be perfectly honest, it's not clear why equalized insurance premiums across regions are per se desirable, anymore than equalized heating oil costs, equalized fresh produce costs, equalized electricity costs, or equalized anything else costs would be. Even under a socialized public system, it might be economically appropriate for insurance premiums to vary by region. A socialist system CAN equalize premiums across the country, but it doesn't HAVE to do so.

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