Exit, Voice, and Health Insurance
By Arnold Kling
Here are my thoughts on the role of reputation in health insurance markets, a topic that Bryan has raised.
I think that reputation matters when exit matters. That is, if people will switch suppliers based on word of mouth, then reputation will be important.
In health insurance, consumer exit is inhibited, for at least three reasons.
1. Most people get their health insurance from an employer. The individual cannot switch companies. The most the individual can do is voice complaints (about non-payment of claims for example) to their human resources department, and hope that the human resources people use the threat of exit to change the insurance company’s behavior.
2. Turning to the individual health insurance market: In many states, such as Maryland where I live, there are not enough suppliers to have meaningful competition and opportunities for exit. The state regulations for “community rating,” “must-carry” and mandated coverage have driven most companies away. The state regulations make premiums so high that few individuals can afford coverage and so not many firms can get enough business to bother offering health insurance in these states.
3. The insurance industry does not have a solution for the pre-existing condition problem, so many people face lock-in. If John Cochrane’s idea of health status insurance were implemented, that would address the problem of lock-in.