Private Insurance Markets: They’re Different

May 17th, 2011 at 8:21 am

I’m going to do a couple of posts on health care this morning, riffing off of two extremely revealing news accounts.  To me, these both fit in the “STMYGH” category (‘stuff that makes you go hmmm’):

The NYT ran an interesting article about insurance company economics this weekend and I was once again struck by how the business of health insurance is so non-markety…yet another reason why we need to get the health reform plan up and running.

The story goes like this: insurers have been raising co-pays (the amount you contribute out-of-pocket when you get medical treatment) which should make people more cost conscious, and in fact, recession-battered families have been responding by seeking less care.  So far, basic econ 101.

But despite the cost shifting and resulting demand contraction, premium prices have gone up as fast as ever.

“…the companies continue to press for higher premiums, even though their reserve coffers are flush with profits and shareholders have been rewarded with new dividends. Many defend proposed double-digit increases in the rates they charge, citing a need for protection against any sudden uptick in demand once people have more money to spend on their health, as well as the rising price of care.”

In competitive markets, sellers can’t typically set today’s prices based on where they expect demand to be in the future.  If one of them did so, others would capture their market share by pricing based on current supply and demand conditions.

The dynamic should lead you to be particularly skeptical about plans that depend on private insurers responding to market signals (are you listening, Rep Ryan?).  Republicans go on about how once everyone’s out there on their own shopping for insurance in unregulated, private markets, competition will drive prices down.

That’s how it works for bananas.  It’s not the way it works for health insurance–folks are locked into plans through their jobs, there’s huge information disparities (their business model is to know who’s risky and avoid them), and most importantly, individuals have minuscule bargaining clout.  So if you wanna shop for health insurance by yourself, just make sure your policy covers masochism.

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8 comments in reply to "Private Insurance Markets: They’re Different"

  1. SteveD says:

    “individuals have minuscule bargaining power”. This exactly describes the healthcare market. Yet, Ryan defenders routinely claim that empowered individuals will bring down healthcare costs… and the assertion usually goes unchallenged. Aside from abstract economic theory what evidence do we have that this will work?

    Individuals who don’t have insurance companies or the government bargaining for them routinely pay HIGHER prices for everything—hospital stays, pharmaceuticals, physicians services. Just the other day the CBO stated that the average Medicare beneficiary would pay 11% more for the same benefits in the private market.

    Currently we have a dispersed group of healthcare consumers buying something they don’t understand from well-connected, highly motivated and organized providers. Guess who wins that bargaining session. Thanks for bringing up the idea bargaining. I think it’s key to this whole debate.

    • Bob Wyman says:

      As counter-intuitive as it may seem, When the product is insurance, the consumer really *should not* have much bargaining power! The business of insurance is all about the creation of a “commons” in the form of a shared pool of resources that can be used to address the needs of policy holders. If individuals have bargaining power over access to and use of that commons, then what you’ll have are all the well known issues involving the “Tragedy of the Commons.”

      In seeing insurance as a commons, we find the argument for universal coverage. When we have several insurance pools, we don’t really have several commons, what we have is a single commons with different groups fencing in different bits of turf within it and each exploiting their part to their own advantage without consideration for the needs of the greater commons. Users of this multi-part commons optimize for their personal needs by buying into those parts of the commons cheapest for them. Thus, the Tragedy of Commons reappears. (The young and healthy get the green, cheaply maintained grass near water while the older folk get the expensive to maintain grass far from water… Eventually, those who start on the cheap grass get forced onto the dry grass.)

  2. Mike says:

    …folks are locked into plans through their jobs, there’s huge information disparities (their business model is to know who’s risky and avoid them), and most importantly, individuals have minuscule bargaining clout.)

    Could modifying the tax treatment of employer-provided health insurance improve consumer flexibility? Also, do you think limiting restrictions on purchasing health insurance across state lines improve bargaining power?

    • AlanWilkov says:

      Hi Mike , The “cross state Lines ” meme is total balogna .
      That is nothing but a race to the bottom on consumer protection. Insurance cos will go to the state where they can offer consumers the least for the dollar. They can sell junk insurance policies that won’t pay when needed most. The ACA actually allows insurance cos to sell across state lines . The big difference : policies have to meet certain standards to offer meaningful policies with consumer protections. The biggest companies will maintain the same advantages as they have now. Many markets are highly concentrated today with little or now competiton.

      • Colin says:

        Race to the bottom? Everytime regulations are passed which mandate that more stuff be covered, premiums go up. What if I don’t want or need all that extra stuff that governments tell me I have to get? What if I want a bare bones plan in exchange for a cheaper premium?

        Please stop trying to save consumers from themselves. Competition and expanded choice works every single time it is tried. It is way past time we had a true national market in health insurance.

  3. readerOfTeaLeaves says:

    I live in the Puget Sound region, and am familiar with Group Health, which is a huge not-for-profit healthcare system.
    In the Group Health system, the pay-for-service model is broken and the system (overall) works quite well. It is at least 50 years old, so there’s plenty of data to back up the model.

    In my view, the Obama administration played right into the hands of healthCos by even talking about ‘markets’ for health care.

    At some point, I pointed out over at FireDogLake that the idea of ‘markets’ for health care is patently absurd. To wit:
    — If I buy a new pair of shoes, no one reading this blog gets ‘more shoeness’ as a result.
    — If I buy another diamond ring, no one else gets ‘more diamondness’ as a result.
    — If I buy a new car (I’m lusting for a Tesla), no one in my neighborhood will get ‘more carness’ because of my purchase.

    Contrast these economic transactions with what happens if I get more sickness: if I cough in your presence, you are quite likely to get ‘MORE sickness’.

    When is the last time anyone reading this toddled off to the shop for ‘a quarter pound of wellness’, or for ‘a half pound of flu’?

    The whole health care conversation struck me as ludicrous.
    The healthCos won the very instant that people-politicians lumped ‘sickness’ in to the same economic category as shoes, diamonds, and cars.

    That’s patently absurd.
    Cars don’t replicate; but viruses and tumors do.
    Diamonds don’t multiply in a petri dish, but bacteria will double or quadruple in hours.

    The entire national conversation (which got worse when the foul term “Obamacare” got smeared around) is sheer lunacy.

    When did we fall for the silliness that all our health care exchanges were ‘market’ force activities?!

    Some things belong in markets.
    Other things — things that quadruple in the night, things that can’t be picked up in quarter pound containers at the local shop — do **not** belong in conversations about ‘markets’.

    I think the administration, despite its fine intentions, failed to make clear to the public that health is not a simple economic transaction.

    By allowing the health care reform to be discussed in terms of ‘markets’ and pay-for-service, the administration shot itself in the foot and failed to break out of the stranglehold of suboptimal, overpriced medical delivery systems.
    It was a very costly lost opportunity.

    • Bill Michtom says:

      The only problem with your analysis is the idea that the Obama admin made mistakes. It got just what it was aiming for: a great deal for the medico-industrial complex.

  4. denim says:

    Current regulations require you to pay double premiums for one month if you decide to switch Medigap insurance providers (one to the old plus one to the new provider). How’s that for helpful comparison shopping? Page 35 of this gov pub: