Should the cost of insurance reflect the cost of use in local hospital markets?

Abstract

Local hospital markets have been shown to vary extensively in per capita expenditures for hospital services and in the reimbursements paid per Medicare enrollee and per Blue Cross subscriber. Insurance premiums do not reflect these differences among local markets, resulting in intermarket subsidies (transfer payments) and distortion of competition between health-maintenance organizations and the fee-for-service system. Regulatory strategies to "cap" hospital costs have ignored these market variations and thus perpetuated the established pattern of expenditures and transfer payments. The plans for implementing a voucher system for the Medicare program set the value of the voucher according to average reimbursements at the county or state level. Since several markets can exist within one county's boundaries, the cash value established for the voucher in some low-cost markets will substantially exceed current per capita rates of reimbursement, permitting large profits and an increase in total costs to the Medicare program. If the price of health insurance were adjusted to correspond more closely to local market conditions, transfer payments would be reduced, and more effective regulation, competition, and consumer involvement might result.