MAKING PRICE COMPETITION WORK—PART 1: THE INSURERS
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 our 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 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 an employer selects plans to be offered, and when employees choose from these plans.
Unfortunately for the reputation of the invisible hand, employers picking insurance options don’t necessarily choose the best value plans. Cost issues aside, they are 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 provided by the same carrier. The result: incumbency may allow insurers to bid higher premiums, even though experience should mean lower risk, while employers may prefer to shift costs to employees rather than switch carriers.
Not only are employers likely to lean towards an incumbent, they may find competing proposals impossible to compare. Large employers have the clout to demand that insurers bid against the same benefit specifications, but others will struggle to compare whatever off-the-shelf packages insurers believe fit their needs. Small groups—even those using a broker—may not have that luxury; insurers will offer take-it-or-leave-it choices of their standard 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 again for classic economics—at the expense of increasing premiums for other options.
Current government programs do no better than employers. Medicare Advantage, far from allowing health plans to go head-to-head with traditional Medicare, subsidizes plans by several percent while encouraging add-on benefits that make comparison impossible. Medicare’s drug program is so popular (read profitable) with insurers that in urban areas there can be fifty or more plan choices, 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.)
Outside of Medicare, 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—suggested as a model for a national insurance exchange—does rather better, offering a shorter list of choices, but unfortunately one in which there is no actuarial equivalence to help determine best value.
So what might make health insurance more price competitive? Reform proponents’ suggestions to help the invisible hand include:
1. Move the primary responsibility for insurance choice to individuals (for example, via an insurance exchange) and require that—except for low-income persons—they bear some meaningful part of the premium cost.
Not everyone in this scenario will make a best value choice, but it should result in greater price sensitivity and greater awareness of the implications of personal health decisions. However, while this would lower costs for small groups and individuals, premiums for large employers (or their employees, depending on the financing structure) would increase if they were forced to switch to the exchange.
2. Establish a standard set of benefits, so that price differences between insurers are apparent.
This doesn’t have to mean “one-size-fits-all;” supplementary benefits (perhaps including alternate deductible levels) could be priced separately, as they are in other nations with guaranteed coverage. The standard benefits could be adjusted periodically to reflect insurance costs and funding availability, although this would shift consumer dissatisfaction from insurers to the government entity administering the exchange function.
3. Guarantee portability, without pre-existing condition limitations.
Essential to universal coverage, this would eliminate the medical shackles that tie workers to their employers (and their insurers) solely to maintain coverage, but would increase insurers’ risk.
4. Provide a risk-adjustment mechanism for insurers participating in the exchange.
Any major change to the insurance system will increase actuarial risk. Insurers participating for the first time in an exchange may have little experience to help set premiums, and will build in a risk factor—unless they receive some protection, either though a risk-adjustment formula (as in the Dutch system) or through reinsurance (a simpler mechanism).
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 issues, which will be discussed in Part 2 later this week.
(An earlier version of this piece appeared in The Health Care Blog.)