Uncategorized

Making Price Competition Work

Wall Street Journal editorial writers and other folk with touching faith in classic economic theory wonder from time to time why competition doesn’t work better in the health care system. (Actually, the WSJ people are sure that it could, if it were not for government bureaucrats and their spendthrift liberal friends).

It does seem as if Adam Smith’s “invisible hand” is affected by a strange palsy as it nears the realm of health care. But why, given the legions of insurers and providers all apparently eager to edge each other out in the race for our dollars?

Theoretically, employer-sponsored insurance—more than 90 percent of non-government coverage—provides two competition opportunities: when the employer selects plans to be offered, and when employees choose from these plans (assuming that more than a single choice is available).

Unfortunately for the reputation of the invisible hand, employers picking insurance options won’t necessarily choose the best value plans. Cost issues aside, they’ll be influenced by the need to avoid the disruption and employee unhappiness that could result from changing plans. Employees won’t want to travel further to a provider, or switch specialists in the middle of treatment, or be forced to leave a well-liked family physician.  Large employers may try to sidestep employee concerns by offering a choice of plan types (like a PPO, an HMO, and a HDHP/HSA), but rarely competing plans within a type; smaller employers may be unable to provide any choices at all, unless they are provided by the same carrier.  The result:  the advantage of incumbency may allow an insurer to bid higher premiums, even though experience with the group should mean lower risk.

Not only are employers likely to lean towards an incumbent, they may find competing proposals impossible to compare. Only the largest employers have the clout to demand that insurers bid against the same benefit specifications; most will struggle to compare whatever off-the-shelf packages insurers believe to be approximate fits to their needs. And small groups—even those using a broker—won’t have that luxury; insurers will offer take-it-or-leave-it choices of their standard small group coverage. And, as in other business arenas, volume counts for a lot. Smaller employers face a double cost whammy: their business isn’t important enough to attract aggressive pricing, and individual risks can’t be pooled among thousands of other employees.

The invisible hand doesn’t shake off its palsy at the employee level, either. Although most workers will have some choice, it will be limited, and “best value” may be impossible to determine. Even more than at the employer level, employees—assuming the employer is paying most of the premium—will pick their coverage to maintain existing provider relationships; only those without such relationships or who must pay a substantial part of the premium themselves are likely to put cost first. If it’s available, HDHP/HSA coverage may appeal to the youngest and healthiest, but—alas for classic economics—at the expense of increasing premiums for other options.

For comparative purposes, it’s worth looking at government programs, if only to see how completely they ignore competitive principles. Medicare Advantage, far from allowing health plans to go head-to-head with traditional Medicare, subsidizes the plans by several percent while encouraging add-on benefits to ensure that comparison is impossible. The Medicare drug program is so popular (read profitable) with insurers that in urban areas there can be fifty or more plan choices, all with different combinations of formulary, pharmacy network, deductible, and monthly premium, proof that more competitors doesn’t mean more effective competition. (Pity the eighty-year-old who must navigate this muddle to pick the best value plan.) State Medicaid programs have tried to create competition among contracted health plans, but such attempts are undermined by inability to pass cost differences on to patients. FEHBP—proposed by almost-but-not-quite-Secretary Daschle as a key part of his reform plan—does rather better, offering a shorter list of choices directly to employees, but unfortunately one in which there is no actuarial equivalence that would help determine best value.

(The difficulties facing employers and employees are not the only failures of price competition in our current system. Elsewhere in the health care jungle, insurers face their own competition problems, which will be discussed in Part 2. Watch this space!)

Meanwhile, what can we do to make health insurance more price competitive? Let’s suppose for one wildly optimistic moment that we could redesign our system without having to worry about the armies of lobbyists for insurers, providers, big business, small business, the medical technology industry, and a raft of well-meaning patient and community groups.

Let’s suppose that insurance choices are made primarily by individuals, rather than employers, and that—except for low-income persons—they must bear some meaningful part of the premium cost. Not everyone will make a best value choice, but wouldn’t this result in much greater price sensitivity on the part of insurers and greater awareness of the implications of personal health decisions by individuals? 

Let’s suppose that we have a standard set of benefits, so that price differences between insurers are immediately apparent. This doesn’t have to mean “one-size-fits-all;” supplementary benefits could be available and priced separately, as they are in other nations with guaranteed health care coverage. Aside from provider network and customer service considerations, wouldn’t this apply the competitive pricing pressure that’s missing today?

Let’s suppose that insurance is guaranteed to be portable, without pre-existing condition limitations, so that the medical shackles that tie workers to their employers (and their insurers), solely to maintain coverage, are broken. Wouldn’t this help to assure that insurers remain price competitive?

Enough, for the moment, of this wild optimism. Part 2 will talk about the insurers’ problems and what in our fantasy world might be done to help the fine folk at our nation’s insurance companies.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.

Also by Roger Collier: The Perils of Play or not Pay                                       A Shakespearean Approach to Health Reform

Livongo’s Post Ad Banner 728*90

Categories: Uncategorized

Tagged as:

12
Leave a Reply

12 Comment threads
0 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
8 Comment authors
Tom LeithDougDeron S.MGNate Recent comment authors
newest oldest most voted
Tom Leith
Guest
Tom Leith

Doug Asks: > One question that I have is why can’t the insurers > use states as their group pools, rather than the > employer? > I’m sure there is some reason, but is it > logical or political? Well, Doug, it’s both. An insurer could do a state-wide pool, they could but they’d make less money. What you are talking about is called “Community Rating”. It means the insurance pool takes all-comers at the very same rate. It pretends that everyone faces the same risk, sets the premiums the same, and then pays the claims. In the Good Old… Read more »

Doug
Guest
Doug

Would we not see more price competition if the employer were not the initial negotiator of price? With the system we have today, my choices are limited to what my employer has negotiated, which does not equal all available options in my state. One question that I have is why can’t the insurers use states as their group pools, rather than the employer? If we moved to a state-based insured group (no, not run by the state, but state of residence as a group category) where my individual policy was pooled with every other state resident, then I could make… Read more »

Nate
Guest
Nate

And the large benefit consultants that put out studies are about as innovative as the post office. They won’t jump on board until they start losing business, you’ll see the trend reflected in their books last, and thus their studies after the fact.

Nate
Guest
Nate

My HDHP reference was to the fact small employers can move the market not about the efficiency of HDHPs. Along that line though maybe I am just that smart as I do have a magic formula for reducing cost, it’s really simple to, don’t pay an insurance company to finance your small dollar claims. 20% savings and no reduction in benefits. Few examples would be over 50 clients on the books right now, and I’m a very small TPA. There is a hundred TPAs doing the same thing I am. Our plans don’t have any cost shift to the employees,… Read more »

MG
Guest
MG

Nate – You probably do have a few examples of where full-conversion HDHPs have worked somewhat but the numbers overall for HDHPs haven’t met the hype. The sustained savings haven’t been as great as advertised after the large-one savings (which usually is funded by a notable cost-shift to employees). Just look at the aggregrate numbers from any of the benefit consultants that are out for in their the mid-sized or large-sized employer space. You act as if there is some magic formula out there that most employers have simply ignored to control cost increases the past several years since HSAs… Read more »

Deron S.
Guest

The real price competition should occur in the patient/healthcare provider relationship. We have given too much attention to health insurance, when we should be focusing more on health care. Health care became a lot more complex when we started worrying so much about insuring for it.

Nate
Guest
Nate

MG I totally disagree and can point to numerous cases showing that is inaccurate. In Ohio it has become VERY popular for employers to buy a HDHP and self fund back to a lower deductible. Carriers HATE this as it reduces their premium 20-50%. 10 years ago only Nationwide and a couple fringe carriers did it. Then MMO in an effort to grab market share started doing it and that forced Anthem and the test to join in. With the exception of Humana all of the have embraced it because of the market forces. Contrast that to CA with their… Read more »

MG
Guest
MG

Ugh. More rehashing of the same tired argument that individual employers should and can drive price competition. Nevermind the fact that is a lost cause for almost all small employers from an actuarial basis at this standpoint. Even for self-funded employers who have the personnel expertise in-house and make the time/effort available to really tackle health care inflation costs, they just don’t have the numbers in a geographic MSA area to really push effective and sustained change by their employees, providers, and health plans. That is why the Bridges to Excellence program and other myriads of efforts by business employer… Read more »

Nate
Guest
Nate

Joe what state are you in? There are ways to gain pricing power it just takes work and time. The problem is for the past 5-7 years employers didn’t care about insurance premiums, they where low enough they gladly bought these 100% plans with minimal cost share and didn’t demand claims information. Now that cost skyrocketed they need to undo the damage they created with their neglect. An employer, especially one with 250 employees should never ever buy a first dollar plan like you had. Even $3000 is a ridiculously low deductible. At a minimum you should have 5K deductible… Read more »

CT IPA Doc
Guest
CT IPA Doc

There is one set of supplier/purchaser arrangements that have not been mentioned: provider-health plan. In most markets these exist as essentially an oligopsony where a small number of large purchasers (Medicare, Medicaid, UnitedHealth, Aetna, Cigna, Anthem/Wellpoint, BCBS, etc.) dictate the price to a large number of disaggregated suppliers for a vast array of services. Anti-trust laws are tilted substantially against providers who try to aggregate to gain bargaining leverage, even those groups which make substantial investments in quality improvement. It would be nice to see the FTC permit providers to be able to aaggregate as a networks and compete on… Read more »

Joe Bob
Guest
Joe Bob

Just to provide an illustration of what a small company is: the firm I am with has 250+ employees and annual revenues of about $45million. We appear to be completely at the mercy of the health insurers, and this in a state where only non-profits are permitted to sell policies. When I started with the firm in 2000 it had what would likely now be considered a ‘Cadillac’ health plan: 100% employer paid premium, low co-pays, no deductible, plus a stipend for uninsured medical expenses. Nine years later: the stipend is gone, premiums up 100%, co-pays up 200%, and employees… Read more »

Skeptic
Guest
Skeptic

Mr. Collier: I’m just curious, have you looked at the Dartmouth Atlas lately? You will see that the Medicare fee-for-service program also seems to favor “incumbents.” How else would you explain why the Medicare program tolerates variations in per-capita provider payments of 100% or more (e.g., Miami vs. Minneapolis) which cannot be justified by variations in quality? As for your comments about Medicare Advantage, you neglect to mention that roughly half of the “excess” payments to health plans are returned to beneficiaries in the form of lower deductibles, copays, and other added benefits. You also fail to make a distinction… Read more »