Competition in the Medical Insurance Marketplace

The conventional wisdom says that, when you have a marketplace for any given product, competition is a good thing. Competition drives down prices, and it also spurs companies to make better products that compete better in the marketplace. One of the big questions facing our nation right now, especially with the sweeping changes to health care regulations that have taken place this year, is whether or not competition is good in the medical insurance marketplace.

One area where the recent legislation might tamper with the competition in the marketplace is in the area of the benefit ratio. Under the law, insurance companies have to pay out at least 80 percent of what they collect in premiums as medical benefits. This has to do with small-group and individual insurance policies. The number for larger groups is even higher, with a requirement that 85 percent of premiums be paid out.

Shrinking the competition

Unfortunately, one of the things that has happened with this change is that some insurers are now getting out of the medical insurance business. They can’t afford to operate at the numbers demanded by the government, so they get out altogether. This reduces the competition in the marketplace, something that is usually bad for the consumer.

Not especially necessary

The new legislation creates medical insurance exchanges in each state, in which medical insurance companies can compete with one another. In that setting, consumers can pick and choose which insurance company they want to do business with. If a company offers the benefits they need, most consumers aren’t worried exactly how their premium payments are allocated. As long as the insurer delivers on their promises, it’s fine for most consumers.

Fast changes reduce competition

This illustrates a bigger problem with the changes we’re facing right now. It isn’t that the changes being made to the medical insurance industry are good or bad (we’ll leave that for you to decide) it’s that the changes are a shock to the system. When changes are put in place rapidly, it creates side effects that can’t often be predicted. A few companies will go under, while others will change the way they operate completely. Ultimately, these fast changes cause there to be fewer and fewer choices in the marketplace.