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Healthcare: Give insurers more power

The industry is hobbled by variant regulations in each state. Let's clear those so that market forces can take hold.

September 20, 2009|David Frum | David Frum is a resident fellow at the American Enterprise Institute.

Conservatives have made clear their opposition to President Obama's healthcare reforms. So does that mean they think the system works well as it is? We asked four prominent conservatives to think beyond their objections to the Democrats' ideas and propose ways to make the American healthcare system better.

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Here's a radical thought:

The big problem with America's private-sector health insurance companies is that they are not nearly powerful enough.

Oh, they are more powerful than most of those they insure. But in the struggles between health providers and insurers, providers usually win. That's why insurance costs have doubled in less than a decade, without any corresponding increase in the insurance industry's profitability.

Elsewhere in the American economy, powerful middlemen act as effective agents for their customers, forcing down prices and improving quality: think Wal-Mart in retailing or Expedia and Hotels.com in the travel industry.

Health insurers hold no such clout, in part because insurance companies are weakened by the division of the American health marketplace into 50 state sub-markets, each governed by its own rules and regulations. Since 1926, federal law has assigned insurance regulation to the states unless the federal government acts to supersede them -- and by and large there insurance has remained.

Imagine how much cars would cost if the car manufacturers had to design completely different models for 50 different markets.

Republican Rep. John Shadegg of Arizona has proposed to solve this problem by allowing health insurers to sell their products across state lines. It's a promising idea, but it doesn't go far enough.

New Jersey health policies cost more in large part because New Jersey hospitals and doctors charge more. If I buy a cheaper Kentucky policy that reimburses my providers at Kentucky rates, leaving me to pay the balance, how much good does that do me? And if the Kentucky policy is made to pay New Jersey rates, there vanishes my low Kentucky price.

What we need instead is to assert federal regulatory authority over the whole marketplace and get the states out of healthcare altogether. Let the insurers do business as national entities; let the market contract to four or eight major insurers; and then let them do unto their suppliers as Wal-Mart does unto its suppliers: squeeze them.

Suppliers will respond by searching fiercely for efficiencies and economies.

Most things cost less in the United States because America's huge internal market allows for mighty economies of scale. In health insurance, Americans have forgone those advantages too long. Liberals want the federal government to displace the private insurers because (they claim) capitalism fails in healthcare. Before succumbing to state control, though, wouldn't it be wiser to allow capitalism a fair and national try?

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