Wednesday, May 15, 2013

Market structure matters

This story shows how the exchange may succeed, but it also points to a problem.  If insurers are allowed to arbitrarily adjust their rates after filing (and after they've seen competing filed rates) there can be de facto collusion.  Insurers could initially file high and then go only as low as necessary to be competitive.  If they all play that strategy everyone files high and there's no need to go lower.  That's not what we want the exchange to do.

On the other hand it isn't plausible or desirable to say that insurers who want to lower their rates and who can bear the risk should be prevented from doing so.

I think the solution is to make such changes expensive.  If a company fudges filed rates the "error" should be widely publicized so as to create reputational damage.  Who wants to pay higher rates just because?  There should also be a financial hit, perhaps by the state contracting out for third party review at the filing company's expense.  Not only does it create a penalty to discourage such behavior, it's prudent since where there's one "error" there may be more.

And I have to add, I'm shocked... shocked that Providence had fat rates.

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