WASHINGTON, OCTOBER 21, 2009-- Panelists at an AEI conference said private health insurance markets can be reformed to provide affordable coverage, reduce costs, and encourage market innovation in ways that do not require a sweeping government-based overhaul of the health care system.

"Putting in place a nationwide public plan is a potentially dangerous exercise in overkill [and] a needless risk not worth incurring, especially if there exist policy alternatives to stimulate competition that are far superior," said Christopher J. Conover, a research scholar at Duke University's Center for Health Policy.

A one-sided portrait of private health insurers has emerged over the past few months, as painted by the Obama administration and its congressional allies in their advocacy for a particular version of national health reform. AEI resident fellow Thomas P. Miller noted in a November 2 National Review article written with James Capretta, that political leaders' demonization of private insurers is simply a politically-expedient way to impose far-reaching government regulations in health care under the guise of "health insurance reform." These tactics, however, ignore and obscure more workable and targeted fixes.

As part of the morning's first panel, Conover, Miller, and University of Pennsylvania's Wharton School professor and AEI adjunct scholar Scott E. Harrington addressed the most frequent political charges made against private insurers. Harrington observed that the view of health insurance companies as unchecked in a quest for exorbitant profits fails to match their real performance record: private insurance is only modestly profitable in comparison to other industries–-profit margins averaged 3.3% over the last nineteen years–-and insurer CEO compensation rates have been substantially below comparable groups in executive pay.

Thus, the most recent political threats to repeal the longstanding, but limited, exemption from antitrust regulation for insurers are no more than "red herrings" (see Harrington's October 21 Wall Street Journal opinion piece for a full analysis). Conover similarly argued that high market concentration among states is, at worst, irrelevant; his own analysis was that large market share explains very little of the variation in health spending levels between states and has no adverse consequences in most local markets.

In Conover's view, the claims of a public plan's effectiveness in stimulating competition through cost savings and affordable coverage should be met with skepticism. Harrington echoed Conover, arguing that market innovations, notably risk-based incentives that allow populations to internalize the costs of unhealthy behavior, should be encouraged rather than constrained. "The best solution is to try to figure out how we might be able to use insurance to encourage healthy behaviors as opposed to assuming the problem away," said Harrington.

As part of the second panel, Miller presented targeted solutions to address the costs insurers bear in covering the most unhealthy segments of the population. He analyzed the efficacy of expanding state high-risk pools (HRPs) as a way to address the unbearable burden of health care costs facing individuals with medically uninsurable conditions. The backbone of an HRP expansion would involve much larger amounts of matched state and federal funds to finance in a sustainable way high-risk protection beyond a reasonable level of risk-based premiums.  These premiums would be capped at either 150 or 200 percent of standard rates; there would also be third-party monitoring of standardized underwriting criteria; additional income-based subsidies for high-risk eligibles; and multiple coverage choices that focus better on more-targeted treatment of the most chronic and costly health conditions. Miller also outlined a more challenging alternative, which would develop ground rules for alternative pooling mechanisms that provide longer-term protection against redefinition of an insured individual's health-risk status.

University of Minnesota associate professor and AEI adjunct scholar Stephen T. Parente presented an integrated plan called "Private Health Insurance Reform I Can Believe In." His proposal centered around interstate competition for health insurance, using a website for online insurance exchanges and placing limits on the tax subsidy for employer-based insurance. Parente estimated that the cost of this proposal would be $450 billion over ten years – a little over half the cost of the health care plan proposed in the Senate Finance Committee. Meaningful market-based reform, he said, could empower health insurance exchanges to make swift transactions by accessing patient information in a manner similar to credit card companies. "They can just be what the word exchange actually means, which is a market-price exchange system, not all the heavy-handed stuff that's in the legislation," he concluded.

-- Rohit Parulkar