HHS and Sen. Ron Wyden (D-OR) believe in fairies and insurance markets

The notion that the health insurance exchanges required by the Affordable Care Act would reduce health care costs using “competition” between concentrated health insurers was always one or more unbridgeable chasms away from a plausible theory.

But the myths of competitive markets are so deeply ingrained in our political discourse it was inevitable that a nominal Democratic President not constrained by conceptual coherence and a corrupt Congress would try to sell us the conceit as the only politically feasible model for health care reform.  The economists — not to mention international experience — told us it was gibberish, but nobody cared.

Now, however, the Obama Administration has given up even the pretense of a competitive model for the state-administered private insurance exchanges.  From Saturday’s New York Times (i.e, a Friday night news dump):

In a major surprise on the politically charged new health care law, the Obama administration said Friday that it would not define a single uniform set of “essential health benefits” that must be provided by insurers for tens of millions of Americans. Instead, it will allow each state to specify the benefits within broad categories.

The first thing you note is that this move is one more step towards Mitt Romney, who argues that RomneyCare might be fine for Massachusetts, but each state should be free to decide for itself how best to provide health coverage — or not.  The White House political geniuses who have managed to position their guy as only barely beating or even with the most embarrassing and offensive array of GOP clowns in memory apparently think moving towards Mitt’s incoherent position will leave one less reason to vote against Mr. Obama; others might conclude it’s one less reason to vote for him.

But let’s return to the unproven theory that “competition” between private health insurers will produce better quality and/or lower prices for insurance and hence more affordable quality health care.  Even economists like Paul Krugman who supported the overall ACA package because, among other reasons, it promised through other means to cover tens of millions of the currently uninsured, warned us that private health insurance does not lend itself to the competitive model, but no one — including Democrats — paid attention to that point.

Still the theory of competitive markets depends on some very basic assumptions.  One of the most important is that for an exchange to make sense, the product must be a more or less uniform commodity/service.  Suppliers are then forced to provide that uniform product, buyers can compare on price or perceived fidelity to the uniform standards, and the invisible hand of competition will force markets to clear at the marginal cost.

But all but the most efficient suppliers hate the model and marginal cost pricing, so the first thing they do to undermine the ability of competition to push prices down to marginal cost is to claim their product is different, new, improved, and thus deserves a higher price — or conversely, claim their inferior/dissimilar product is the same as their competitor’s and thus deserves at least the same price.  Consumers have little power to determine whether this is true, and cannot afford to find out when they’re sick; the inherent information disadvantage is then exploited by suppliers.  So much for competition driving down prices, even if insurance markets were not highly concentrated, which they are.

What Mr. Obama’s HHS has done in the hope of beating Mitt Romney is to facilitate the market’s ability to be less competitive and thus to raise prices.

To be sure, each state could define it’s own uniform product, and HHS explains this as a virtue:

Under this approach, each state would designate an existing health insurance plan as a benchmark. The benefits provided by that plan would be deemed essential, and all insurers would have to provide benefits of the same or greater value. Plans could modify coverage within a benefit category so long as they did not reduce the value of coverage.

Whom are they kidding?  If Rick Perry’s Texas can define the state standards anyway they want, and decide whether private insurers who contribute to their campaigns qualify, and there’s only general federal guidance on categories of coverage,  we wind up with inferior or even phony health insurance in Texas compared to Massachusetts — exactly what we have today.  Does anyone believe that humans who happen to live in Texas, because they just moved there from Kentucky and West Virginia, have fundamentally different health needs from Californians or those in Nevada who just moved there from Michigan?  What was the point of a national reform with a national mandate?

And you have to wonder what this does to the fed’s arguments before the Supreme Court about the necessity of a national mandate premised on the commerce clause.  I thought it had something to do with the need for nationally applicable standards to address state and regional differences that adversely affected the national economy.  But perhaps with this Court, theoretical coherence is not important.

I might be more charitable towards giving states more leeway in defining minimum benefits if we didn’t have states like Mississippi and Louisiana, or governors like Scott Walker, Kasich, Rick Scott, et al,  and if the stingiest/most conservative states didn’t have such dismal records on withholding essential health care in the State Children’s Health Insurance Program and Medicaid.  Are we going to leave these decisions to the horror governors of Florida, Wisconsin and Ohio?  A principled, courageous President would be anxious to end the tolerance for such inhumane neglect.

It’s not as though America has no favorable experience in defining nationally uniform standards for medical coverage and then insisting that private insurance alternatives meet or exceed the minimum federal requirements.  It’s called Medicare, which, unlike the pretended “competitive” private insurance market, actually does lower health care costs.   Unfortunately, we keep getting “useful idiots” like Oregon’s Sen. Ron Wyden who can’t remember this.