Journal of Health Politics, Policy and Law 25.1 (2000) 211-223
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The Politics of Reform
Robert B. Hackey
The articles on individual health insurance market reform in this issue raise fundamental questions about the role of competitive markets in promoting access to health care. The decision to impose new restrictions on insurers, or conversely, not to regulate insurers' rating and enrollment practices, rests on certain core assumptions about how the world works (Thompson 1981). In New Jersey, for example, policy makers viewed rating and enrollment reforms in the individual health insurance market as a means to reduce the number of uninsured persons (Garnick, Swartz, and Skwara 1998). This basic policy hypothesis undergirds individual insurance market reforms such as the removal of preexisting-condition clauses, limitations on underwriting practices, and the introduction of community rating. If this assumption is flawed, however, incremental reforms will be ill-equipped to address many of the most significant shortcomings of the marketplace.
The articles in this issue return to the familiar "competition versus regulation" debate which dominated the health policy literature in the 1970s and 1980s. First, what lessons can be gleaned from the case studies? Should state government reject insurers' claims of "actuarial fairness" in enrollment and rating in favor of reforms designed to protect certain groups from discrimination? What are the consequences of doing so? Second, can incremental reforms which regulate the rating and enrollment practices of insurers effectively limit discrimination against chronically ill persons or other high-risk subscribers? Or are regulatory cures worse than the disease? Finally, what are the political dynamics of reforming the individual health insurance market? Under what circumstances are reforms most likely to surface? [End Page 211]
The Politics of Lesson Drawing
Before investing scarce political capital and resources into promoting health care reforms, legislators and other state policy makers frequently turn to colleagues and think tanks for insights about which groups will benefit and lose from the proposed changes. State policy makers draw on closely knit intergovernmental networks to keep abreast of recent developments in health policy--organizations such as the National Governors' Association, the National Council of State Legislatures, and numerous policy centers and think tanks provide updates of recent legislative initiatives, policy debates, and court cases for decision makers. The diffusion of innovations is a two-way street--while successful reforms are quickly emulated by others, policy disasters can be avoided by following the experience of others. The case studies in this issue raise an important policy question: Why did insurers withdraw from states which reformed their individual health insurance markets? Were the reforms so restrictive that insurers found it impossible to sell individual policies and make a profit?
As the articles by Adele M. Kirk and Mark A. Hall demonstrate, while the number of insurers selling policies in a state may decline in the wake of reform, individual market reforms do not invariably lead to a market implosion. Although reforms clearly cut into insurers' profit margins by enabling previously "uninsurable" persons to enter the individual market, the decision of insurers to exit the individual market seems out of proportion to the scope and timing of the changes passed by state legislatures. In Kentucky, for example, most reforms never took hold, but insurers left anyway and have failed to return. Nevertheless, the experiences of Kentucky and Washington have become policy anecdotes (Rochefort 1998) or symbols (Stone 1997) of the perils of state intervention in the individual health insurance market.
The decision to exit the individual health market is not preordained for indemnity carriers. Instead, as Albert Hirschman (1970) observed, firms may respond to a changing market environment in three ways, which he terms exit, voice, and loyalty. Kentucky's and Washington's experiences illustrate the exit option: insurers chose to leave the market when faced with the threat of adverse selection. Alternatively, insurers may also seek to shape reforms through the legislative process (voice) or seek new ways to earn a profit under the new regulated market, using the threat of exit as a bargaining chip to exact concessions from subscribers...