Competition in the healthcare industry
John Hood, writing at The Corner, grumbles about the shuttering of Principal Financial’s health insurance division. This is understandable since Principal Financial provides Mr. Hood with his own insurance.
Here’s the New York Times:
At the Principal Financial Group, the company’s decision reflected its assessment of its ability to compete in the environment created by the new law. “Now scale really matters,” said Daniel J. Houston, a senior executive at Principal, which is headquartered in Des Moines. “We don’t have a significant concentration in any one market.”
And here’s Hood:
United HealthCare is reportedly going to offer health plans to former Principal subscribers, including me, but we have no idea what those plans will look like. As competition shrinks, they’ll certainly be more expensive and less flexible. At JLF, we had carefully designed two consumer-driven options — one based around health savings accounts and the other around health reimbursement accounts — and experienced excellent results, including several years of nearly level premiums. Now, we’ll just have to see what administration ideologues and federal bureaucrats will permit us to purchase. [emphasis added, EDK]
Mr. Houston from the Times piece is correct: scale really matters. Having a very large risk pools is important if you want to contain health care costs. Having a multitude of small, regional monopolies with relatively small risk pools is not a good way to approach health insurance. But it’s the way we’ve been doing it for years. It’s also, contra Hood, not terribly competitive. If anything, the closure of more small insurers, and the consolidation of big insurers could lead to more competition rather than less, and lower costs for consumers rather than higher costs.
This is one reason I really wanted to do away with the monopoly protections the government grants health insurers, and wanted both the exchanges to be national and to permit health insurance to be sold across state lines. Scale matters. One reason single-payer can be so effective at cost controls is that the government has massive scale, a huge risk pool, and can really strong-arm the supply-side. Really big insurers with national markets and national risk pools would have similar bargaining power but would also have the added pressure of competing with other really big insurers.
The question is whether we will see this sort of good consolidation, increased scale, and increased competition under the new law or whether we will see consolidation lead to more monopolization. Making the exchanges national and allowing insurers to compete across state lines would go a long ways toward ensuring the first scenario. As it stands, of course, Mr. Hood is leaving out the part about the status quo. Whatever complaints he may have about lack of competition under the new law could just as easily be applied to the way things are now.
Healthcare risk management is one of the things I do for a living, and so this is one of those topics I know something about. And one of the things that drives me mad in the HCR debate is the way we talk about the need for “competition.”
Bottom line: Despite the shared use of the word “insurance,” your health insurer is fundamentally different from, say, your auto insurer. It is likely that you will never need your auto insurance to pay much, if anything. If you don;t get hit by a bus, you WILL need access to massive amounts of cash through your health insurer – eventually.
The thing I find no one understands about health insurance carriers is that their main function is to act as a negotiator of prices and services against your providers – who are consolidating. Simply put, the larger percentage of “clients” they have, the more negotiating power they have and the lower your costs are. The lowest insurance premiums are in areas where there are dense populations, and only one or two carriers.
This idea that having a lot of carriers will reduce costs as if insurers were selling apples sounds nice and fits in our basic free market model way of thinking – but it just isn’t correct.Report
@RTod, Yes and yes. However there are people who will seriously argue that the market in health care is no different from the market for wheat, twinkies and ipods. One simple theory explains every kind of market. Seriously people will claim that.Report
OTBW- Your post on BJ comparing the McHealthplans and an equivalent plan from an exchange was great. Just solid win.Report
Anyone supporting a reform where insurance is sold across state lines has to propose a new regulatory scheme, because the state-by-state insurance offices are the main way insurance is regulated. This is part of our federalist system, for historical reasons that go way back. So either intersatate sales need to be regulated by a new and not insignificantly large federal bureacracy, or some sort of interstate compact system needs to be developed. These are major legal and constitutional issues that really have to be addressed directly.Report
@Xenos, How about leaving financial regulation of insurance companies at the state level, but allowing plan designs across state lines. That is,I can buy a plan approved for sale in any state (which may not have all the mandated benefits in my state) so long as the carrier is licensed to do business in my state?Report
@Underwriterguy, You probably are more knowledgeable than me but I believe the problem with selling plans accross state lines is that some states do not permit varying premiums based on health profile and others do. The plans in states that allow underwriting will be able to enter the states that don’t and siphon off the healthy population by offering them lower prices. The sick ones left behind will increase premiums until you they are priced out of the insurance market.
You then end up with a two tier health system of insured healthy people and uninsured sick people. Some right leaning types seem to like this idea and would address the uninsured sick people by offering them vouchers or subsidies to buy insurance….but the logical consquence of this to me seems to be a type of single payer system where the gov’t ends up insuring all the sick people. Why not go right to single payer if you really want to go there?Report
@Boonton, Boonton, you raise a good point, especially as regards the individual and baby group markets. Self-insured plans have an ERISA exemption from the mandates, but groups buying real insurance do not. I’d like to see the ERISA exemption extended to all insured groups. This would leave the financial regulation and underwriting rules to the states, but avoid the added costs of frivilous mandated benefits.Report
@Underwriterguy, Here I’m a bit reluctant given my experience with Dental Insurance. Dental to me appears to set up like a casino.
My benefits say a root canal costs me $X amount of money. But when I get a root canal I don’t just pay $X. I pay some other amount because the dentist does like 15 things as part of a root canal. The insurance though, only pays for 12 things. For some of the things it doesn’t pay, it tells the dentist he may not bill me at all, for other things he may bill me but only a certain amount, and for other things he can bill whatever he wants.
The interesting thing is that even with an office worker whose supposedly ‘very good’ at estimating what I have to pay, I still get a bill from the office a month later. While I’m sure there’s logic to it, the effect is the insurance is more like a lottery ticket that pays for some random percentage between 50-70% of the bill. I haven’t had this experience with my health insurance.
What worries me is that with no mandated benefits you could do a wicked job of constructing a ‘swiss cheese’ policy that sounds like a standard health insurance policy but ends up hitting you with lots of holes. Such a policy would appear to be cheaper than a ‘standard policy’ at first glance but really isn’t.
I’m not quite sure what the benefit is then. How much do ‘frivilous mandated benefits’ really add to premiums?Report
@Boonton, “It depends.” Really, it depends on how many benefits have been mandated over basic care that you would expect. Some typical mandates are for chiroprators, nutritionists, hair transplants, and really any health care profession that can lobby the state legislature to mandate health plans to cover their particular field. Google “State Mandated Benefits” and you will find more information. Here’s one link
http://www.ncsl.org/default.aspx?tabid=14463Report
@Boonton, Here’s a better website for a good understanding. http://healthinsurance.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=healthinsurance&cdn=health&tm=141&gps=461_2188_1223_663&f=00&su=p736.9.336.ip_&tt=2&bt=1&bts=1&zu=http%3A//www.cahi.org/cahi_contents/resources/pdf/HealthInsuranceMandates2009.pdfReport
@Boonton, I reviewed the pdf but I’m still skeptical. For one thing many of the mandates appear to me to be stuff you’d expect a ‘standard’ policy to cover (testicular cancer, mammography). Other stuff would seem to actually lower costs (a midwife, are pregnant woman not going to give birth if midwives are not covered? And I don’t see Obgyn’s getting upstaged by midwives in terms of negotiating for high rates). Most of the items are estimated at ‘less than 1%’ which tells us very little. The most dramatic thing listed is ‘mental health parity’ near 10%. That’s something we can debate BUT the increases we see in health care costs are across the board, not centered on mental health care only.
What I’d consider is maybe defining a ‘standard’ health policy that covers a set of reasonable things we mostly agree on (shrinks and midwives yes, hair transplants no) but allow companies to offer ‘sub’ and ‘super’ standard policies provided they are clearly labeled as such.Report
@Boonton, Also from the list we can drop the ‘covered persons’ mandates. I think everyone whose thought about health insurance seriously concludes that just about everyone *should* be covered. We can argue whether they will be covered by gov’t, by vouchers, or whatnot but if everyone is covered then there is no ‘cost of mandating’ coverage. Everyone is part of the pool somewhere.
Or to put it another way, is it sensible to advocate a policy of making health insurance cheaper by tossing people off insurance?Report
NYTimes:
What in the hell are you talking about?
How does one get “small regional monopoly” from “we don’t have a significant concentration in any one market?”
You just completely pulled that out of your ass.
It seems increased monopolization is exactly what you are going to get.Report
It just needs a few tweaks here and there and it will be fine. Just remember the greater good, and don’t pay too much attention to the details.Report
There’s a few ways for a health insurance company to make serious money. They can negotiate good prices with doctors and hospitals. They can study the relationship between health care and health and target areas where a lot of money is spent but without much good for health. Or they can kick people off before they get sick and leave only people who are unlikely to get sick on.
When you have a lot of ‘competition’ (i.e. not much scale, lots of smaller insurance providers), this last tactic can be highly effective & is one of the reasons the HRA targetted insurance policies that had a lower portion of premiums going to actual health care versus administrative costs. Of course the blunt way of doing this is to get real nazi-ish on pre-existing conditions but there’s subtle ways to do this as well (for example offer a policy that has plenty of ‘soft’ benefits like reduced gym memberships, alternative therapies like aromatherapy and ‘holistic healing’. People who are relatively healthy will be attracted to such a policy, people whose primary worry is making sure their chemotherapy is covered won’t be impressed).
Unfortunately, the two ‘good’ ways of making money are very hard. Hardballing doctors and hospitals requires having people who are really smart on staff to outwit their claims that various therapies are ‘medically necessary’ and PR people on the other side to keep patients from getting too angry when their doctors tell them “I think this will make your less likely to die but your insurance company says the science isn’t there”.
Likewise figuring out ways to reduce costs by improving ‘bang for the buck’ is really hard, especially when you consider an environment of small insurance providers means a lot of benefits may not accrue to the company that provides them. For example, it may be that providing 3 sessions a year with a nutrionist for $300 a year will delay the onset of diabetes several years and save thousands of present value dollars. But when there’s lots of insurance companies and people switching around every few years the money saved by delaying the onset of diabetes will probably be enjoyed by some other insurance company.
What’s intersting about large scales is that they make some of the ‘good incentives’ more enticing and the ‘bad incentive’ less so. Imagine a world of huge insurance companies, say maybe 3 companies each have about 1/3rd of the market. Striking good deals with doctors and hospitals is easier (since becoming ‘out of network’ can cost you 1/3 of the patient market). Likewise figuring out which procedures work and which don’t, even over the long term, is more valuable. With 1/3 of the market chances are the savings you achieve will be enjoyed by you rather than your competitors (and if some are enjoyed by your competitors, so what, they will likely send you some patients you’ll enjoy too). Kicking out sick people is less enticing. You’re not a tiny fish in a big ocean but you’re running 1/3 of the entire ocean. You can spread the costs of the sick among a huge base of patients and it isn’t so easy to push sick people off on other insurance providers (since they control 1/3 of the market too they are big enough not to be stupid suckers). Of course I’m assuming a world of universal coverage where the sick can’t be offloaded into the bucket of ‘no insurance’.
What’s interesting is that the scheme offerred by the HCR bill seems to hit the best of both worlds. Competition doesn’t work because the most cost effective way for insurance companies to ‘compete’ is to offload the sick. If, though, you close off that option by prohibiting discriminating against pre-existing conditions you only leave two other ways to compete; striking good bargains with healthcare providers and getting rid of expensive procedures that don’t produce much in terms of actual health. The likely result is probably not going to be a market of numerous small insurance companies in the way that, say, the market for nail salons work. The result is probably going to look like the market for operating systems, cars, banks, Office software, and cell phone providers. That would be a market dominated by one or several huge companies with maybe a tiny share shared by a fringe of tiny companies.
The important part, though, is that competition remains in the system. This is in contrast to single payer where you max. out the negotiating power aspect by having a monopoly on paying for health care. Even if the market ends up looking like search engines with a ‘Google’ providing 95% of insurance competition is still implicit in the system as the monopolist can loose his market share. While the HCR concept was complicated and messy in relation to the ‘cleaner’ concepts like simply importing Canada’s or the UK’s model, it might actually prove the be the better one in the long term.Report
@Boonton,
That sounds good, and allows for a great villain in insurance companies, but it just isn’t correct.
I live in Oregon, where it has been illegal since the Clinton administration for an insurer to cancel based on pre-existing conditions. What’s more, insurers are not allowed to underside against pre-existing conditions for new insureds at annual open enrollments for group plans. And we’re not the only state that does so. If what you believe were correct, insurance companies would have lower profit levels per regional premium dollar and a higher rate of premium acceleration than other states. But we don’t.
Health insurance is NOT like auto insurance. The insurers don’t collect millions and then try not to spend it. It is set up so that they make 3-4% over and above whatever the annual health expenditures are.
Which is not to say that the current HCR is good or bad; just you need to understand the system doesn’t work the way you think it does.Report
@RTod,
Yes, but that doesn’t fit in to the evil capitalist conspiracy theory, thus it must be rejected as inconsistent.Report
@RTod, I don’t think I’m assuming insurance companies are villians, simply institutions whose motive is profit. All else being equal, an insurance company would rather not send out a check for $500. That’s all. I’m sure even in Oregon they behave this way. From what I understand most insurance offered by large employers works basically along these lines. The insurance company is basically just charging the employer for the total medical expenses by the employees plus a mark up to cover the administrative costs and profit.
Why, though, do employers buy this service? Why not just directly reimburse employees for their medical bills? I’d suspect its because insurance companies are providing the other two types of competitive strategies; they are negotiating preferred rates with docs and hospitals and they are using their data mining and analysis skills to weed out unproductive medical spending. If employers simply paid directly for medical expenses they would get overbilled so much that the 5% ‘markup’ isn’t too bad.
But you still have some subtle ‘pre-existing’ screening that I think can happen. First employer provided benefits assumes people with jobs which tends to be people who are healthy enough to at least work and in working age range. Ditto for people buying insurance policies directly. Also if the cost of the policy is just the actual medical spending plus a mark up you have a subtle incentive for employers to discriminate against the sick. Additionally you still have the ability to screen out the sick by creating policies that offer lots of frilly soft benefits that appeal to the healthy but not the sick.
Also I’m not sure your hypothesis is correct. First in a state where there is no restriction on pre-existing conditions competition would still drive down profit levels. Insurance companies don’t get rich by denying the $500 claim. They hold on to their business because if they did pay the $500 claim they’d have to raise premiums and would then loose business to the companies that have lower premiums through the ‘pre-authorization nazi’.
In a state that doesn’t allow the pre-existing tactic, insurance companies still compete based on their negotiating power and their data mining power. Ultimately both regimes will produce insurance companies whose profit is basically ‘spending on medical care plus 5%’. Where you see the difference I suspect is not insurance profit rates or even overall medical spending but the efforts to data mine out people who are going to get sick being redirected towards harder negotiating and better evaluation of treatments.Report
@Boonton,
Your arguments are clear, well thought out and logical. So much so that I’ve linked over to your blog, which I must say I enjoy. But…
Regardless of what the motives are (and you are certainly correct about their motives), or how certain scenarios might play out, the point is that health insurers don’t operate on the fundamental business model you suppose they do.
Monitoring insurers (including health insurers) is what I do for a living. And the truth is health insurers don’t operate the way you think they do. In fact, assuming that they have those insured on the books already and don’t have to take them on as a new unrealized liability, health insurers LIKE having chronically sick people, because they make 3-4% over and above whatever the projected costs are – and the more medical bills means more projected costs, which means more money for insurers. In fact, every year, EVRY year, insurers break their previous years records for profits. That’s because costs go up almost 8% a year, which means their revenue goes up about 8% a year.
There is a flaw in the system, (actually there are many), but you’re focusing on a strategy that fixes a problem that doesn’t exist. The main problem with health insurers in our system isn’t that they make more profit by not insuring people once they get sick. It’s that their main function (other than process claims) is to negotiate lower prices from providers for you and your employer, but that they are disincentivized (I know, I know, I made up that word) to do so.Report
@RTod, From what you’re describing, though, why do people want to purchase this insurance? Why wouldn’t it be simplier for a large company to simply directly reimburse employees for health expenses while pocketing the 8% markup from the insurance company?Report
@Boonton, For my part, I reckon that employees are skittish about such things.
What if the company said “you’re having your silver fillings replaced with composite fillings? Isn’t that a little extravagant? We won’t cover that” and you’re stuck holding the bag?
(Yes, I know. The insurance companies already pull this crap.)Report
@Boonton,Yea but there’s two value added services so far:
1. Processing the checks, this isn’t exciting but it does take time and money.
2. Putting a lid on extravagant expenses, this requires having medical experts on staff that can evaluate the validity of claims (rather than just reimburse).Report
@Boonton,
Well, as an aside to your response to JBird I’d argue that the biggest benefit they provide to people is ensuring that by being part of the group is that when you have your pike year in costs you are not forced into bankruptcy.
But to the point above, I would argue that you’d have the same issues, just under a different framework. Because even though it’s easier to just blame insurance companies (if you’re a D) or the gauh’ment (if you’re a R) the problems are a lot larger, and the potential solutions are going to be more difficult to agree to.
Who pays, or how they pay, is kind of irrelevant. The problem is that usage and costs of usage are going up 8% a year, in a way that does not translate into an 8% increase in national “healthiness.” (Another made up word.) Health insurers don’t increase costs by 8%, users and providers do.
You can have your employer reimburse you, but aside from the fact that they won’t have the scales of economy that an insurer does to negotiate lower prices, you’ll still be on a trajectory where, if you are in our thirties and have one kid, your cost of healthcare will average over $40,000 a year by 2025 – cutting out an insurance company only reduces that pay a couple of percentage points, which are probably going to be eaten up by your employer who will now need to do the administration.
The reason that no one has implemented a simple, painless solution to what is a huge and growing problem is that a there is no simple, painless solution.Report
@RTod, Who pays, or how they pay, is kind of irrelevant. The problem is that usage and costs of usage are going up 8% a year, in a way that does not translate into an 8% increase in national “healthiness.” (Another made up word.) Health insurers don’t increase costs by 8%, users and providers do.
Well actually I don’t necessarily object to this. In general quality improves over time as does price. If everything improves at exactly the same rate then our spending on various things increases at the rate of economic growth. If health care improves faster than other things then its rate of growth in spending will be higher than the economic growth rate. That either will continue or not. If it doesn’t then growth will taper off. IMO this will happen to drug prices as pharma companies have more and more trouble bringing new drugs to market and old blockbusters go generic.
If it doesn’t, though, then health care’s share of the economy will grow eventually making it occupy nearly all the economy which will mean the economy will grow at health care’s rate. What would such a world look like? Imagine nearly all jobs revolve around health care in some form. Imagine 100 inch flat panel HD 3D TV’s are sold in the local dollar store. Nearly everything non-health is so cheap you barely even think about its cost. Not necessarily a bad world.
IMO this is a major problem with long term ‘deficit doomsday’ projections. They neglect to consider the fact that if health spending continues the same trend forever it must eventually drive up economic growth. Or its spending will flatten out.
But getting back to it, why? If this increased spending does nothing for ‘heathiness’ then why accept it? Why spend $40K in 2025 for what you can have today for $8K? Will doctors, nurses and hospitals just all get paid more in 2025 relative to today? If that’s the case whatever they got going on is better than any union public or private has ever produced. And what’s the deal with insurance companies negotiating better prices then?Report
@Boonton, In this thread there are two concepts of “insurance.” The real kind found in individual and small group health policies (where underwriting is key) and the non or self insurance kind found in many policies from 200 employees up. In the later underwriting is not found except for late entrants. So, IMO, you are all in complete agreement so long as you define which segment you are concerned with: ind./small or everyone else.Report