All in the Public Interest: Part 2 – Insurance Regulation

The recent and ongoing debacle with Obamacare is not the first example of the government acting in the public’s interest, and it is not the first example of government failure, as we showed in our last article on the unintended consequences of regulations.  When government seeks to provide goods that are already produced privately, it does so at higher costs than its private counterparts.  For example, research work by professors Bennett and Johnson analyzed data from nearly a dozen industries and found that the government provision of private goods came at twice the cost!  Work by ACI expert and Widener Economics Professor Dr. Joseph Fuhr came to a similar finding when analyzing the gross inefficiencies of government operated broadband networks.  The fact is that these policies, while sometimes designed to help the less fortunate, often produce a disproportionate and negative impact on taxpayers and consumers, including lower income consumers.  These ventures are almost always a bad deal for taxpayers.

Even if the government-run operations could produce something at comparable to the private market in terms of consumer prices, regulators and legislators are often temped to distort prices and service offerings, including cross-subsidization between policyholders, services and geographic markets.  The result of this price meddling always leads to inefficiencies that harm consumers – sometimes affecting the poorest consumers at the benefit of others.  The example of Florida’s government-run homeowner insurance program demonstrates this point.

Florida’s Citizens Property Insurance Corporation is a state-run insurer that was established to provide homeowner insurance to coastal Floridians unable to find coverage.  Today, Citizens has become the largest homeowner insurer in the state by providing below-cost pricing for insurance to coastal homeowners while passing these losses to other Floridians — including inland residents, those who cannot afford or do not own a home, and those with private insurance policies.  In other words, everyone pays more so coastal homeowners can pay less.

Here is the rub – wealthier Floridians tend to live along the coast, and most of Citizens’ customers do not even live in these coastal homes.  That is because many of the subsidized property owners have the financial means to own multiple homes and live elsewhere, including 200,000 that live out of state and out of the country.  That’s right – Citizens currently gives subsidized insurance to Florida property owners living in China, the principality of Monaco, the Grand Duchy of Luxembourg, Canada and elsewhere, while putting ordinary Floridians on the financial hook.  According to state statistics, 90% of Canadians pay cash for their Florida home and still qualify for subsidized insurance for their beachfront homes.  Lower income consumers who live inland are among those on the hook to pay for these subsidies.  In short, while there are certainly exceptions, the state’s insurance handout is largely a subsidy for the rich.

What is the Solution?

As the recent Obamacare debacle shows, while there can be market failures, there certainly can be government failures.  Going forward, policymakers and regulators need to use a rigorous cost/benefit standard to demonstrate that policies ultimately achieve better outcomes for citizens and the economy than the market can achieve.  Otherwise, imperfect markets are better than imperfect government policies.  While it has become too easy for lawmakers to say these good deeds are in the “public interest,” it would just be nice to see the math.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research.

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