The Market Mechanism and Health Insurance in Rural Places: Lessons Learned From an Economics and Policy Perspective
This paper focuses on unique challenges in health insurance markets facing rural people, providers, and places. We identify how and when these challenges stem from what economists call "market failures," defined narrowly or broadly, and review how previous government interventions and programs have sought to redress insurance market failures. Issues such as lack of economies of scale, which leads to relatively high fixed costs, and low population density, which creates tension between the goals of risk pooling and provider network formation, are elucidated. A broad definition of market failure includes consideration of the benefits to society (e.g., caring for the poor and disabled, improving population health) accrued through the provision of healthcare, which may also be disproportionately rural. The issues we discuss, viewed through the lens of economic theory, suggest the need for additional structure or regulation to support any market-based policy solutions. Policy considerations presented in this paper include maintaining insurance reforms while strengthening risk adjustment and reinsurance; redesigning rating areas and network adequacy policies; incentivizing plans to offer coverage over large, perhaps nationwide, service areas while discouraging the county as the unit of coverage; encouraging the development of rural provider networks; shifting focus from paying for medical interventions to paying for prevention; and restructuring payment to reflect the different cost profile, i.e., higher fixed costs and lower variable costs, that is often true for rural places.