What are the gains from competition among insurers?

Annual_Change_Premiums_for_ESI_FEHBP_and_CalPERS

Ezra Klein reports:

For people, like, well, me, who think that the health insurance
exchanges have a real shot at lowering health-care costs throughout the
system, the graph
above is difficult. For conservatives who believe that the key to
constraining health-care costs is to encourage competition between
insurers and give individuals the opportunity to choose, the graph
above is difficult. Because what the graph above shows is that neither
of those strategies has worked terribly well, at least as of yet.

The bottom line is that premiums seem to go up no matter what the institutional structure or its degree of competition.

Comments

Not to worry. The Democrats plan is for the Government to say premiums won't go up, and they won't. Problem solved. Of course, it will cause another problem which is that care will be dramatically rationed, but hey, premiums won't be going up!

Wait, so you're saying that premiums go up no matter which system we use to isolate consumers from the costs of their decisions? That can't be right.

At least (according to the graph) premium growth appears to be converging on long run inflation. Perhaps the health care bubble is subsiding.

The other part of the problem is that consumers don't pay for the insurance directly - the employer does in most cases.

People keep confusing competition among insurers with competition in health care. If there's no real competition among health care providers, they're going to charge near-monopoly rents. Which is what they do.

Many markets can't be profitably served by more than one large hospital, many people are averse to switching hospitals, and there are insanely high barriers to entry for anyone who might want to enter the market.

If you're going to regulate prices, you need to regulate the prices that hospitals and providers charge insurers, and not the rates that insurers charge customers.

A few comments:

1. This is year over year change and not the level.

2. Does not contain info about full costs--deductables, for example. Employer plan that increases deductables can have a lower premium.

3. No comparison to individual pay markets.

4. Not relevant to the headline of Tylers blog: "What are the gains from competition from insurers? "

Great insights, jhn. Admonishment of providers, or even discussions of cost factors, is almost always absent from healthcare reform talks. I think this partially stems from the herofication of doctors in popular culture. Insurance companies and workers make much better villains.

It's sad to think that in another universe Ezra Klein could be a useful human being.

The supply of healthcare services is restricted (i.e. regulations, licensing, CON, etc). The long-term income elasticity of the demand for healthcare is greater than 1.

As long as supply is restricted and incomes rise†¦what is the likely outcome of future healthcare costs? We can nationalize the entire system but as long as private providers are allowed, total healthcare spending (and year over year increases) won’t change much.

Listen to the insurance segment from the recent This American Life (episode "More Is Less") and it should become apparent why competition doesn't keep costs down.

The only thing that can keep costs down (besides price controls which will decimate innovation) is treating health care like any other good and looking at the price before you buy. That means no more employer insurance, no more comprehensive insurance plans that pay for routine (i.e. non-insurable) costs, doctors that know and disclose what procedures cost, and major tort reform.

Of course this will not happen. What will happen is we will edge ever close to single-payer and the end of the advance of medicine.

@Yomotov: You are right, but smaller insurers can also be more efficient, because they mostly include a healthier baseline of customers. I mean it is not only size, it is also the frequence of insurance usage that drives up costs. Also, if you are a smaller insurer, you need to get better deals that means they have to barter for better MRI fees and such stuff. If you compare insurance rates and rates that are made by deals between individuals and a hospital/doctor, then you still see a margin of possible cost reductions.

It is less about the cheapest hospital. An MRI at a good hospital or an MRI at a cheap hospital still is an MRI. Also, in difficult cases, you still want to consult a specialist who is most likely not from this hospital. So I think the good/bad hospital thing is the smaller problem as long as you have the say in it and NOT the insurer.

Insurance competition alone can't fix the problem: The costs for the same procedures are still much higher than they are in Europe.

Look at something like well baby visits to a pediatrician: My insurance was charged $800 for a 25 minute than included $150 worth of shots, at cost. This prices are about par around here. Is this really anywhere near what a competitive price should be? Where do the extra $650 go to? There's either not enough pressure on providers, or just too many costs that providers must incur to provide care.

Same sort of increases for Medicare, the ultimate single payer. The insurer-payer is not the right level to get at medical costs. It will never work, except possible by brute force, where the government just dictates the terms to the providers, and the providers adapt as best they can.

Transaction costs are not 0 when choosing a health insurance plan.

How many people on the exchanges above change plans from one year to the next?

We know why the US spends more than other OECD countries:

1) Doctors and nurses are paid more in the US
2) We use more of the newest (<3 yrs old) drugs and medical technology Given the very low profit margins of health insurers, we know that the extra money is not going to health insurance companies. #1 is the mystery. I have no clue on this one, as we certainly have as many doctors per capita as most OECD countries with way lower physician compensation. Maybe our doctors are willing to stand up against the government better :) #2 is simple, we hate not getting the "Rolls Royce" care, even if it is Obama's "red pill", the most expensive drug or technology with the least track record. It is even easier if Medicare or our insurance pays for it "instead of us".

Babar - Really? Overpaid employees? Excessive RENT? Or maybe it's the over-priced copier paper and exorbitantly expensive electricity they use to light their offices. Oh, and I heard from a friend of a friend that health insurers burn 20% of all premiums for fun.

Everything else being equal, low profit margins do show that's not where the money's going. For that matter, health insurance companies take in a relatively small portion of overall healthcare spending compared with providers.

To provide a concrete example, I consulted with a radiation oncology practice that charged about $45k per patient and had something like a 70% gross margin. The docs made $500k base with a bonus and equity in the company. I don't begrudge them the business given how the market's set up, but insurance companies would kill for those margins and/or compensation.

Curious wins comment of the year. Truly.

Curious's point is that health insurance inevitably insulates the consumer from his choices, so he will consume more than would be efficient. I'm sympathetic to that argument. But if so, is not the correct solution to somehow ration care?

Sure, it's political suicide to support rationing care, but that seems to be the only logical solution to the problem, unless one wants to ban health insurance.

In looking at insurance companies profits the correct metric is not margins.

rather it should be return on capital.

Different industries work on different model, some are low margin high turnover like grocery stores, other are high margin low turn over industries.

P&C insurance firms work on a leverage principle or model. thus margins have little or no connection to return on capital the true measure of profitability.

Because maybe what is driving premium increases has nothing to do with market structure?

You are right about this... In Europe they have an universal health care system which is covered by the state itself based on a small tax fee they collect from each paycheck a worker gets... That is what we need in the US... and that would also mean the death of the health insurance companies which manage to murder people everyday because they refuse paying for expensive treatments such like cancer on the pretext that they are not making a profit... really? that is murder... 1st degree... drug rehab Tempe

AnnaS is right.The European health care system is much better then what we have in US.Our health insurance companies kill people every day and nobody seems to care.Nobody who can do something about it.Addiction Treatment

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