Health Costs: Try Competition

The Washington Post recently ran a lengthy story comparing the efforts of the Clinton and Obama administrations to pass health care reforms. Many liberals are anxious that Obama's push will end the same way Clinton's did: as dead and stinky as a beached mackerel. The Post writer, Ezra Klein, makes clear that he understands one of the causes of escalating health care costs -- but misunderstands the systemic flaws that make rising prices unavoidable. He notes that "the Justice Department judges an industry 'highly concentrated' if a single company controls more than 42 percent of the market. By that definition, 94 percent of statewide insurance markets are highly concentrated."

Klein is right that consolidation drives up costs as a result of decreased competition. He notes that WellPoint controls 60 percent of the insurance market in Indiana, Wellmark 71 percent in Iowa, and Blue Cross/Blue Shield 83 percent in Alabama. He adds that "predictably, health care premiums shot up more than 90 percent between 2000 and 2007, while the profits of the 10 largest insurers increased 428 percent over the same period."

So Klein correctly diagnoses one of the causes of health insurance inflation. But he seems to miss the underlying disease. Klein's story suggests that the blame for high premiums rests with the free market. In truth, insurance companies have been able to seize such huge market shares in their respective states, at least in part, because of reactionary laws that ban consumers from purchasing health insurance from outside of their home state. If someone in Virginia wants to buy insurance from an innovative company that is based in Ohio but not approved to do business in Virginia, it is illegal for him to do so. This leads to less competition and, inexorably, higher costs.

During the 2008 campaign, John McCain called for ending the costly prohibition on interstate commerce. Unfortunately, this sensible reform appears nowhere -- as best we can tell -- in any of the plans being pushed by congressional Democrats.

The market gets blamed for a lot these days, but it is absurd to pin high health insurance premiums on markets when excessive regulations are much more culpable. Any health care overhaul should repeal the ban on interstate health insurance shopping.