SB 1522: Political Judgment versus the Wisdom of Crowds

I guess the theory is that regulators know perfection when they see it. And have the wisdom and detachment from mundane concerns like politics and pressure to deliver it. At least that seems to be the thinking behind Senate Bill 1522.

Under this legislation, introduced by Senator Darrell Steinberg, California regulators would establish five classes of individual health plans. The bill requires these categories to would gracefully arc from low cost (and, presumably, lower benefit) plans to higher cost (and higher benefit) offerings. All medical plans would need to fit into the five defined categories.

Supporters claim this approach will allow consumers to make apple-to-apple comparisons among plans. Todays market, they argue, is too confusing. Consumers are hard pressed to select from the dozens of options before them which one suits their needs the best. (As discussed below, they never seem to mention the availability of professional agents to help consumers make these choices — that would undermine the need for this particular solution).

Supporters are also concerned about risk segmentation. Their concern is that healthier individuals gravitate to lower cost plans and their less healthy neighbors rush to buy richer benefits at a higher cost. As a result, those high end plans get more expensive more quickly.

The arguments in favor of SB 1522 are not without merit. But that doesn’t mean the bill deserves passage — at least not in its current form.

The trade-off for simplifying the market is eradicating choice. If all medical plans have to fit into prescribed categories, innovation and improvements in terms of plan design goes away.

Imagine what would have happened if in the 1980s government regulators defined five categories of cars. No other vehicles would be available to consumers. The political battles between groups advocating inclusion of their pet enhancement would be fun to watch. Muscle car enthusiasts would be pitted against gas mileage advocates. Proponents of big trunk space would duke it out against those pushing for smaller cars (the better to fit them into those “compact” parking spaces just coming into vogue. 

The battles would be fierce and there would be winners and losers. One thing for certain: the cars of today would look pretty much like those of the 1980s. And whether hybrids or other offerings unanticipated 20 years ago would have emerged is uncertain. Instead, choice would be determined by the political winds blowing through Sacramento at the time. The influence of the market would be secondary at best, and perhaps marginal.

Which makes no sense. The market is the collective decisions of millions of consumers. It’s the wisdom of crowds. Proponents of SB 1522 would replace that wisdom with the judgement of politicians and their appointees.

The problem of risk segmentation is serious. Unfortunately, SB 1522 does little to solve it. The segmentation will still exist, just within the confines of the five categories. Unless the regulators cram the tiers together into minor variations on a single theme, there’s going to be significant differences between the rates and benefits along the regulated continuum. Consumers will gravitate to the one that makes the most sense for their needs. Supporters of SB 1522 claim there will be substantial differences between the tiers, but if so, then the bill won’t solve the segmentation challenge.

SB 1522 is flawed, but it’s likely to pass (whether the Governor will sign it in its present form is unknown — at least by me). Its author, Senator Steinberg, is the President Pro Tem in Waiting.  That makes it extremely difficult for lawmakers to challenge his proposals. This is the pre-honeymoon stage of his ascension during which everyone makes nice. Voting no is not generally considered to be an effective way to make nice.

But perhaps some lawmakers will step forward and offer ways to improve the bill. For example, there’s no need to make the five categories defined by regulators exclusive. Carriers could be required to offer at least one plan in each category, but still remain free to offer coverage outside those tiers. This would allow easier comparison for some offerings while maintaining a market that delivers choice, diversity and innovation. It would also provide useful feedback to the regulators. If consumers consistently choose plans outside the defined tiers, they would know corrective action is required.

Can consumers be trusted to handle a diverse marketplace offering innovative choices? Will they always make the right choice? There’s no guarantees. Even if the government eliminates a great deal of the diversity in the marketplace, consumers may make the wrong decision.

But there’s already a resource available to those looking for the right health insurance plan: independent agents. Professional agents understand the language. They can explain the trade-offs between Plan A and Plan B. They can get to know the prospect and help them explore their choices. They can even help them through the application process and help with any problems arising after the sale.

Choice can be daunting, but it can also lead to innovation and help the system evolve as needs, expectations and desires change. Helping consumers find the plans that best fit their needs is something better left to shoppers and their agents than to a political process. Just ask anyone driving a Prius.