Insurance Competition

by Don Boudreaux on December 16, 2009

in Competition, Complexity & Emergence, Health, Myths and Fallacies, Nanny State, Regulation

A Dr. Joel Harrison takes aim at Whole Foods’ CEO John Mackey’s reasons for rejecting Obamacare.  (HT Kristi Kendall)  Dr. Harrison’s aim is poor.  Here I address one of his off-target claims, to wit:

[Mackey proposes] Repealing mandates on what insurance must cover & state laws which prevent insurance companies from competing across state lines. [But, alleges Dr. Harrison,] Without some minimum national regulations and means of enforcement, companies will incorporate in states with the least regulations and enforcement, leaving consumers vulnerable.

Dr. Harrison here invokes the “race to the bottom” thesis — a thesis for which there is very little empirical support, at least at the level of international competition.  Chapter 4 of Nathan Jensen’s fine 2006 book Nation-States and the Multinational Corporation: A Political Economy of Foreign Direct Investment contains an especially good empirical test of this thesis and finds it to be incorrect.

Of course, international jurisdictional competition differs in some respects from intranational jurisdictional competition.  But the “race to the bottom” thesis seems unsupported at the intranational level, too.  Massachusetts and New York, for example, do not regulate and tax as lightly as do Texas and Mississippi.

But what about the logic of Dr. Harrison’s assertion that consumers will be “vulnerable” without national regulation?

Dr. Harrison presumes that competition takes place only at the stage of incorporation decisions – that is, when governments in the likes of Alabama, Utah, and Delaware compete against each other for corporate business.  He, though, ignores competition that takes place at other levels.

Most importantly, Dr. Harrison ignores competition among private insurers for customers.  The very same logic that might drive state governments to reduce regulations on insurers — drive state governments to better balance the costs of regulations against their benefits — also drives insurers to provide optimal policies for customers.

In both cases, an entity seeks greater patronage, and is driven by competition against similar entities to make their offerings more attractive to potential customers.  In one case, it’s state governments competing against each other for insurers to incorporate within their jurisdictions.  In the other case it’s insurers competing against each other to sell policies to consumers.

It’s inconsistent for Dr. Harrison to highlight competition operating vigorously at one level (among state governments) while ignoring competition at another level (among insurance companies).

Indeed, because state-government decisions are driven not solely (probably not even chiefly) by narrow economic concerns but, instead, by political considerations and symbolism — and because state governments have the power to tax — state governments are less likely to compete single-mindedly for whatever revenues they can get from more insurance-company incorporations than are insurance companies to compete single-mindedly for customers.

More generally, Dr. Harrison naively supposes either (1) that individual consumers are too ignorant or too docile to compare different insurance policies and then choose the ones that best fit their needs, or (2) that insurance companies will somehow not respond to this exercise of consumer choice.

Both of these suppositions are worse than questionable; we have lots of evidence that they’re empirically false.  Consider the abundance of ads on television, radio, the web,  billboards, and newspapers by auto-insurance companies competing for customers.  If insurers were unresponsive to customer demands — or if consumers were the ignorant and docile creatures that Dr. Harrison presumes them to be — these ads wouldn’t exist.  (Progressive Insurance even boasts about its ability to craft policies to fit very specific individual needs.)

Health-insurance ads are less plentiful, of course, than are ads for automobile insurance and for life insurance.  But this fact is surely the consequence of health-insurance being purchased chiefly through employers.  Health-insurance ads and sales pitches are aimed (as a result) at employers rather than at the public at large.

When I served as president of the Foundation for Economic Education (1997-2001), I was impressed by the vigorous sales pitches that different insurers made to me in their attempts to persuade me to offer their policies to my employees.  And these insurance salespeople never failed to point out to me what a good recruiting device this or that splendid feature of their health-insurance policies would be in attracting and retaining good employees.

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