Private Sector Socialism, Part II

The congressional leadership has been very vocal lately about the need for competition in health insurance. These are people who have previously never had a good word to say about “competition” in their entire political careers. They are the very same people who have previously resisted (and even ridiculed) proposals to allow health insurers to compete across state lines.

They hate the idea of private Medicare Advantage plans competing with Medicare. They tolerate (but dislike) the “privatization” of Medicaid. They steadfastly resist using S-CHIP or Medicaid funds to pay employer-provided insurance premiums. But they are born-again free enterprisers when it comes to the newly envisioned “health insurance exchange.”

The problem is, the competition the leadership has in mind is not real competition. It is artificial, one-price-for-all competition, in which insurers would be barred from charging different buyers different premiums, depending on their expected health care costs. Here is a principle in health economics that is not generally understood, even by most of my colleagues:

     Theorem: When health plans are not allowed to compete on price, they will not compete (in a positive way) in any other dimension either.


Health reform is stayin’ alive

Now put the premium aside for a moment and think about everything you would like to get from an insurance company. Here are a few items on my list:

  • Has clear and transparent explanation of benefits
  • Is easy to communicate with
  • Answers questions and supplies information clearly and promptly
  • Approves most doctor recommended tests and procedures with few bureaucratic obstacles
  • Corrects billing errors and other mistakes promptly and with minimum hassle

In other words, I would like a health insurer that does not act like the Department of Motor Vehicles.

Now, ask yourself this question: How important are the above features to you? How much extra would you pay for them? If you are healthy and not using any medical services, the answer is probably: not very much. And this is especially so if you know you can switch insurers every 12 months. On the other hand, if you are sick and currently using lots of health services, my list is probably very important to you. You probably would be willing to pay something to obtain those services.

Now in a managed competition world (a health insurance exchange), insurers must charge a community-rated premium and take all comers. In such a world, every insurer is going to try to attract the healthy and avoid the sick. A good strategy is to avoid my wish list (or avoid spending any money on my wish list), get the premium as low as possible and try to attract people who are buying only on price. The opposite strategy — raising the premium in order to provide my wish list of services — would be financially suicidal.

Contrast the artificial competition that takes place in an exchange with real competition in real insurance markets. Remember the phrase “You’re in good hands with Allstate.” This message and other TV ads by casualty insurers ask the potential buyer to think about what happens to you after you develop a problem.

If the health insurance market were a real market, we would see similar ads. They would say “If you have a heart attack or a stroke or get AIDS, you’ll be in good hands with [Aetna. Humana. UnitedHealth. Fill in the blank].” I guarantee you there is no such ad running in any health insurance exchange.

Comments (12)

Trackback URL | Comments RSS Feed

  1. Brian W. says:

    Competition implies profit motive. And profit motive implies someone getting rich at the expense of someone else (a greedy insurance executive getting rich from a person who is sick, in this case).

    Liberals just can’t abide the notion that health care should cost anything. They don’t understand why the whole enterprise can’t just be a human right, provided free of charge.

  2. Bart Ingles says:

    I’m beginning to think that as a nation of three-year-olds, we may need to actually touch the stove in order to learn that it’s hot. Naturally, it’ll be the stove’s fault when we get burned.

  3. John Thacker says:

    “When health plans are not allowed to compete on price, they will not compete (in a positive way) in any other dimension either.”

    I agree with most of what you say, but I’m unsure of this. I think of the airlines before deregulation. They were not allowed to compete on price, but they did compete on amenities. Certainly, it resulted in amenities favored by the wealthy, their only clientele with the high regulated prices, but I do think that they competed in a way that the wealthy view as positive and would like airlines to return to. (It has become obvious that the marginal consumer, voting with her dollars, prefers the lowest possible ticket price for most airline travel over paying more for amenities.)

  4. Don Levit says:

    John provides 2 areas of thought for me.
    First, the ability to switch insurers every 12 months.
    I am confused if he sees this as a plus or a minus.

    Second, what do insurers do for you after you develop a problem?
    Insurers are not promoting this part of their benefits.
    Why not?

    Competing on price is essential.
    But competing on price only for the next 12 months is detrimental to long-term sustainability.
    Don Levit

  5. Joey Donuts says:

    Hospitals do not compete on price for insured patients. They do, however, compete with other things. Hospitals that offer full service at the hospital without the patient having to seek supplementary treatment outside the hospital lower the actual “cost” of the patient because of less inconvenience.
    Of course, some of the in house services, such as pharmaceuticals, which the patient cannot obtain outside the hospital have prices set at monopoly levels.

  6. Ken says:

    Interesting theorem. It’s the first time I have seen anything like it.

  7. Paul Nachtwey says:

    Prepare for:

    Physician shortages
    Very long waits for procedures
    Having to live with fixable physical problems and pain due to rationing
    Innovation stifled

    Why in our system is there so much money and resources chasing medical innovations and specialties? It’s because that is what we want when we are suffering health issues. We want to be cured, we want the best there is to offer, we want minimal invasion, we want a complete cure, we want to avoid being wracked with pain and other ailments due to the treatment. In short, we want innovation and advances, and we want them to accelerate. We need to be prepared to accept that others have determined that we have enough in the way of medical advances and that promising research and treatments for dreaded cancers and cognitive problems will not evolve in our reformed system.

  8. imperfect says:

    One thing to keep in mind is that the big, the established, always try to stifle competition from the new upstarts. This is why labor cozies up to government (after all, what is bigger and more established than the US Government?) and why insurers were willing to cut a deal with the White House, and why health insurers are not making much noise on their own behalf about “not being able to compete across state lines”. Patients love the latter point; insurers do not.

    One should always prefer a free market, but when big business, whether it is agribusiness or unions or pharmaceuticals or insurers or any other would-be monopoly, co-opts the regulators, then what you have is no longer a free market. The old term was “mercantilism”. Then we called it “progressivism”, and lately we are calling it “corporatism”. The difference between this and fascism is that the establishment does its dirty work in the courtroom instead of on the street. Its hired thugs are carrying subpoenas and court orders, instead of clubs and brass knuckles.

  9. Don Levit says:

    What a well-thought out and beautifully worded comment.
    You must have given this important issue a lot of thought over the years.

    Business, ideally, should be conducted so that it is a win-win for both sides, customer and seller, over the long run.
    We are far, very far from that type of objective in the present environment.

    Without the present mindset as a foundation, how can we expect any other result than imperfect, if not utter failure?
    Don Levit

  10. Don Levit says:

    Sorry, folks, the last sentence should have started with “With the present mindset.”
    Don Levit

  11. Breck says:

    Why won’t the Democrats even consider allowing the purchase of health insurance across state lines? It seems simple to me — state legislatures have mandated that all sorts of services and treatments must be covered by health insurance issued in the various states. Why do they enact these mandates? If you are a chiropractor, or acupuncturist, or fertility specialist, or hair replacement clinic, or take care of children with autism, you will have very few customers if what you do is not covered by insurance. On the other hand, if what you offer is covered, you can have many patients and charge big fees because the insurance company is paying the bills and the customer doesn’t care what it costs. So, the Association of Chiropractors, for example, lobbies the State legislature to force the insurance commissioner to mandate that health insurance policies cover chiropractor services. Now all your people can make a good living. But all that lobbying and all those payoffs are for naught if health insurance can be sold across state lines — if you believe that chiropracty is quack medicine and you don’t use it, then you can buy a less expensive policy from another state that doesn’t require the coverage. The Democrats just don’t want to stir that hornet’s nest, just like they don’t want to take away the livelyhood of trial lawyers by enacting tort reform measures.

  12. Larry Walker Jr says:

    Don Levit said, “Second, what do insurers do for you after you develop a problem? – Insurers are not promoting this part of their benefits. Why not?”

    Ever heard of ‘AFLAC’?

    I want catastrophic health insurance only, and to pay cash for routine services. Health insurance is really a bad investment from both sides unless you are a member of a policy holder owned co-op for a number of years.

    For someone who switches insurance companies every time they change jobs it’s like buying a new term life policy every few years. You have to start all over again with a new company who has nothing in reserve for your care. That’s why health insurance should be portable in the same manner as life insurance. Only then would you start to see ‘return of premium’, and ‘cash value’ health insurance policies. But you’ll never see that in our current employer based ‘term’ health plans.

    I would thus favor what was laid out in HR 3400 over the Big Government idiocy.