Stuart Kasdin: A Better Way to Steer Private Insurers

By Stuart Kasdin
Thursday, September 17, 2009; 10:48 AM

Some consider it essential, but there may be better ways to compel private insurers to act in a less predatory and more efficient manner than a "public option." To paraphrase Al Gore, the federal government is better at steering than rowing. The government should steer the private sector by offering private insurance companies the right to service large groups of the 40 million now-uninsured for a period of years, maybe 5 or 10. It is the size of the contract pool that gives the government leverage to affect the private markets. Government would make the companies compete -- with innovation and efficiency -- in order to win the contract bundles.

In the auctions, the insurance companies' bids would be evaluated on cost and other factors. With performance-based contracting, the government specifies desired end results and leaves it to contractors to decide how best to achieve them. Criteria could include annual health ratings and customer service evaluations. To avoid incentivizing companies to underbid contracts and fail to achieve their targets, the government would consider past performance in future contracts.

A different proposed alternative to the public option, nonprofit insurance cooperatives modeled after rural electricity cooperatives, could have a role: They, too, could bid on contracts, which would enhance market competition, particularly in areas where there are fewer insurance options.

To further enhance the competitive forces, individuals not subsidized by the government would be eligible to participate, joining at certain open-season points. Likewise, private companies and other groups could buy into a competition pool in order to lower their insurance costs.

Regulation would still be necessary. The right to bid on contracts would only be open to companies that demonstrate they were good citizens. That means they don't avoid patients with pre-existing conditions, seek to drop expensive patients or deny procedures to those who needed it. The eligibility of insurance firms to compete for contracts would also serve as a metric for the public, reflecting that these firms have achieved a minimum standard.

Stuart Kasdin teaches political science at University of California, Santa Barbara. Previously, he worked at the Office of Management and Budget.

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