Why do states produce health insurance?

While I was writing my paper about different redesign efforts for the MinnesotaCare program, I began to wonder, why does the government provide insurance? Insurance is an expensive business for state governments. According to the Kaiser Family Foundation, Minnesota spent $2.9 billion on Medicaid in 2009. So, why would the state spend valuable funds in a well-developed industry when they could use those funds for other need projects?

Normally a government intervenes only with instances of market failure. So what is the market failure that has occurred in the health insurance industry that requires government intervention? There are two central reasons why the government provides health care. First, the government redistributes income because pure markets do not enable all participants to earn an adequate level of income (Santerre and Neun 276). Insurance can be cost-prohibitive and therefore an unaffordable good for many Americans. According to the Kaiser Family Foundation the average employee contribution to a family health insurance plan was $4,000 in 2010 (Kaiser). This premium price makes insurance inaccessible for many families that are just above the federal poverty line. Therefore, the government implements income redistribution programs to assist low-income families in obtaining equal opportunities in the insurance market.

A second reason is that imperfect information exists in the insurance market because some consumers do not “understand the technical terms and conditions contained in health insurance policies” (Santeere and Neun 287). Insurance policies can be very complex and people often do not have the ability to directly compare competing policies to choose the best product. By producing insurance, the government prevents vulnerable consumers from the consequences of being deceived by imperfect information.

The United States government has found another method to intervene with an imperfect information market failure that does not require it to be an insurance producer. The Patient Protection and Affordable Care Act (ACA) of 2010 included provisions for each state to establish a health insurance exchange. The exchange is an online marketplace for consumers to compare all available insurance plans in their state. The plans will be categorized by type of benefits included and price. Consumers will be able to directly compare plans from competing companies in order to choose the one that best fits their needs. The exchanges will provider more information to consumers so they can participate the insurance market without fear of being deceived.

Wisconsin has made significant progress with create the infrastructure of its exchange. Check out the state’s prototype website here. Minnesota received a planning grant for the exchange from the federal government, but no legislations has passed to implement the program. A couple exchange bills have been introduced this session (one from Rep. Gottwalt and Rep. Erin Murphy), but neither bill has made it out of committee.

Kaiser Family Foundation. Family Health Premiums Rise 3 Percent to $13,770 in 2010, But Workers' Share Jumps 14 Percent as Firms Shift Cost Burden. 2 Sept. 2010. Web. .

Kaiser Family Foundation. "Minnesota: Federal and State Share of Medicaid Spending, FY2009." State Health Facts. Web.

Santerre, Rexford E. and Stephen P. Neun. Health Economics: Theory, Insights, and Industry Studies. Mason, OH: South-Western Cengage Learning, 2010.