Health Insurance Exchanges May Be Too Small to Succeed

[eridani]

http://economix.blogs.nytimes.com/2012/11/23/health-insurance-exchanges-may-be-too-small-to-succeed/

With the re-election of President Obama, the Affordable Care Act is back on track for being carried out in 2014. Central to its success will be the creation of health-insurance exchanges in each state. Beneficiaries will be able to go to a Web site and shop for health insurance, with the government subsidizing the premiums of those whose qualify. By encouraging competition among insurers in an open marketplace, the health care law aims to wring some savings out of the insurance industry to keep premiums affordable.

The evidence is mixed, but some of it points to a counterintuitive result: more competition among insurers may lead to higher reimbursements and health care spending, particularly when the provider market--physicians, hospitals, pharmaceuticals and medical device suppliers--is not very competitive.

In imperfect health care markets, competition can be counterproductive. The larger an insurer's share of the market, the more aggressively it can negotiate prices with providers, hospitals and drug manufacturers. Smaller hospitals and provider groups, known as 'price takers' by economists, either accept the big insurer?s reimbursement rates or forgo the opportunity to offer competing services. The monopsony power of a single or a few large insurers can thus lead to lower prices. For example, GlennMelnick and Vivian Wu have shown that hospital prices in markets with the most powerful insurers are 12 percent lower than in more competitive insurance markets.

Greater competition in the insurance industry--either through health insurance exchanges or other measures--may not lower insurance premiums. Weakening insurers' bargaining power could instead translate into higher costs for all of us in the form of higher premiums.

In financial markets, we ask if banks are too big to fail. When it comes to health care, perhaps we should ask if insurers are too small to succeed.

Comment by Don McCanne of PNHP: It is true that very large insurers within the exchanges can use their monopsony power (controlling the market as exclusive buyers) by demanding lower prices for health care services, but only for their own plans. Most health care costs will still be covered by employer-sponsored plans, Medicare, Medicaid and other programs. Thus plans offered by the exchanges cannot have much impact on our total national health expenditures.

Another difficulty with the monopsony power of private insurers is that when they are investor owned (WellPoint, UnitedHealth, Aetna, etc.), their first priority must be to use their leverage to benefit their investors. That results in insurance innovations that often are not particularly transparent, but have adverse consequences for the patients they insure. The private sector exercising power as a monopsony can be as evil as a monopoly.

In contrast, a public monopsony can be very beneficial in getting prices right--high enough to ensure adequate capacity in the delivery system, yet low enough to ensure value in health care.

The ultimate beneficent monopsony would be a single public program covering absolutely everyone ("single payer&quot . We could achieve this easily by improving Medicare and then making it universal. Health policy studies have proven that this would not only cover everyone, but it would finally bring us that elusive goal of health care reform - bending the cost curve to sustainable levels.

My comment: It has always seemed to me that "competition" in funding health care makes no more sense than having competing fire departments, for pretty much the same reason.

[cali]

1. In Vermont, the state controls hospital prices.

In any case, this isn't the best of all possible worlds and Medicare for all is not even remotely on the horizon.

[Scuba]

2. I predict Americans will somehow overcome their fierce loyalty to the insurance companies ...

... and flock to the exchanges in droves.

[eridani]

3. Most won't be allowed to. You can't if you have employer-based insurance already

Those eligible for Medicaid expansion won't be in them either. Besides which, the insurance companies are precisely the entities submitting plans to the exchanges.

[OKNancy]

4. I think that with so many states opting out that the federal exchange

will have plenty of people.

[eridani]

5. Only if it is going to be a single entity

Could be wrong, but I thought that the feds would be setting up separate exchanges on a state-by-state basis.

[OKNancy]

6. I don't know either, it was my impression

that it would be one big exchange. You are right though, if it is state by state, it wouldn't be as efficient.