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.