Increased Health Insurance Competition Doesn’t Do What You Think It Does

As a principled pragmatic, I often reject the ‘Right vs. Left’ or ‘Tyranny vs. Freedom’ debates that political parties and moneyed interests frame for us. I find that our best solutions are usually arrived at when we as a country focus and build upon those common-ground areas where we agree.  So you’d think I’d be delighted with the current monomania both parties are giving to the idea of increased competition among health insurance carriers as a way to reduce health insurance costs.

The President and the White House staff often cite the need for increased competition.  So does Mitt Romney, as he looks to unseat them.  As do Senate Republicans, House Republicans, and pundits alike.  In fact, when I googled either “Health Insurance Competition Editorial” or “Health Insurance Competition News” I did not find any real dissent to this common sense Truth that increasing the number of health insurers will drive down the cost of premiums, and therefore healthcare costs. You’d think that this meeting of the minds across the aisles would have me skipping down the street, happily whistling a dubstep Kumbaya/It’s A Small World medley.  But instead I just find that my jaw is sore from the teeth grinding all this talk is making me do.  Seriously, it drives me fishing nuts – it makes me want to pull out the very tiny amount or hair that I still have right out of my skull.  Because while everyone on both sides of the aisle might agree, there’s the slight problem that everyone on both sides of the aisle is absolutely, positively, totally, incredibly, 100% wrong.

Increasing the number of health insurers in a market doesn’t decrease premiums.  It increases premiums – a lot.  Any public policy that looks to encourage more insurers competing in the same markets are going to backfire and make our annual premium increases far worse than they already are.

There are two reasons for this:

1. You’re Relationship With Your Insurer Isn’t What You Think It Is.  

The phrase that I have heard a lot in my job over the years is that health insurance “acts in a way that is counter-intuitive to free market principles.”  But over time I am more and more thinking that this isn’t quite right.  I have started to think instead that it is more accurate to say that health insurance does do what we would intuitively expect it to do in a free market, but that by and large people don’t understand a health insurer’s relationship to themselves.  In essence, your health insurer’s relationship to you is not that of a vendor or a retailer, as your auto insurer’s is; it also acts as your financial advocate.

Your health insurer actually has three main functions.  The first two are obvious: One is to administrate claims, another is to pool risk. But it also negotiates the costs that providers can charge you for any given task well in advance of your visiting your doctor.  Your provider network wishes to maximize its profits (even non-profit providers), and because of this they want to charge you more than they currently do.  Your health insurer acts as a large buying group, and as such negotiates on your behalf for lower charges.  In addition, your carrier will negotiate against your provider selling you services that are unnecessary, overly expensive, or even harmful.  They will demand generic prescriptions are made available to you when those generic prescriptions are as effective at a fraction of the cost as those new hybrids that are designed by pharmaceutical companies for the sole purpose of charging you more money with a unique chemical compound.

The view that many people have (and liberal pundits foster) of a health insurance company sitting on piles of money – trying to find ways not to pay claims so they can keep it all for themselves – is a fiction.  Like workers compensation, health insurance is a pass through system; insurer contracts are set up so that the insurer makes a couple of points of the top.  In fact, the more claims an insurer pays the more premiums go up, and the more profitable the insurer becomes.  When you hear about an insurer refusing to cover pre-existing conditions, it isn’t actually the carrier’s money they are trying to protect – it’s the money and future premiums of the other group members.  They don’t absorb those costs, their clients do.  (It is still self-serving, though; an insurer can absorb so many costs as to make its clients decide they don’t want to do business with them any longer.)

So, why does this mean that more insurers lead to higher rates?  Understand that providers themselves bind themselves together to negotiate as large groups. In fact, the days of having many small providers are disappearing, as large provider conglomerates continue to absorb one another.  So when your insurer negotiates with “all the providers” in your state, they are really only negotiating with a few separate, giant entities or negotiating groups.   The number of actual clients (potential patients) is fairly static, so the more insurers there are the smaller piece of the pie they represent.  The smaller a piece of pie you represent, the less power you have in negotiations.  Imagine: If there are two providers in your state and yours represents 50% of all the potential clients, most providers find that they are willing to come to the table and sacrifice a lot of margin in order to secure the rights to those clients.  But if there are 30 insurers and each represents 3% of all the potential clients, there is no reason for a provider to meet any demands for cost cutting – the insurer needs that provider to survive, but the provider can easily live without the insurers clients.

The fact of the matter is that the fewer health insurance carriers there are in any given state, the lower the premiums will be.  The surest way to increase premiums is to flood a state with dozens of carriers and make each toothless when negotiating with provider groups.

2. The Law of Large Numbers Does Better With Larger Numbers

Unlike the relationship-to-the-client angle, the law of large numbers issue carries through to all lines on insurance.  Put simply, the law is this: the greater the sample of data, the greater the chances of predicting the outcome.

If you own a roofing company with ten employees, for example, my underwriters can’t begin to predict with any degree of accuracy how many of those ten employees will be injured on the job over the course of the next year, or how much it might cost to treat them.  But if you join together so many roofing companies that you collectively have one million employees, my underwriters’ prediction of how many will be injured and what it will cost will be so damn close it will seriously creep you out.

As stated above, as the number of insurers in a set population increases that same population’s client-to-insurer ratio decreases.  This means that the more carriers there are in a state, the harder it is for any one to predict outcomes accurately.  It should surprise no one that when faced with a model that predicts with less accuracy, an insurance company is not inclined to say “Well, we’ll just cover the loss if we guess wrong.”  Instead, they charge more than their model predicts, to make sure that they are not left holding the bag if their predictions fall short.  Should expenses be less, they’ll keep holding onto that cash in IBNR accounts, because the next year might not be so kind.

Your auto or home insurer can often get away reducing premiums with this unpredictability.  Because those lines do not act as a pass through, they can risk their shareholders’ reserves in the hope of getting more market share.  But for pass through lines like workers compensation or health insurance, doing so can too easily lead to insolvency.  The only pass through system carriers I have ever seen do this successfully are state accident funds, since the people that run those funds know they have their state’s general fund pie to dip into if need be.  But even that leads to disaster sooner or later.  (I’m lookin’ at you, California!)

In fact, if there is a concern I have about government being involved with dictating healthcare insurance policy it is a fear that the law of large numbers will be ignored in favor of political expediency.  A lot of the people we work with are high-mucky-muck enough that they actually have a seat at the wonk tables in Washington (for now anyway).  The concern I get from them is that politicians’ self-serving desire to deliver only good news makes them ill suited to give the deference needed to the necessary statistical tables.  This is worth noting.  Democrats are saying there is nothing to worry about the plan as is.  Republicans are saying we absolutely should worry, because the numbers they see look too big; they say it costs too much as is.  But every insurance professional I know that is reviewing PPACA agrees that the plan doesn’t cost enough.  They don’t worry that the costs shown are too outrageously high – they worry that it won’t be sufficiently funded.

Normally with these types of wonky expert-driven policy decisions, I have faith that the people behind closed doors will avoid doing fabulously stupid things just to appease the people that don’t know how things actually work.  I expect politicians to say fabulously ignorant things, like the heavier a vehicle is the less likely you are to be injured in it at high speeds. And I expect that all the people that didn’t pay attention in physics class the day they taught momentum will nod along and tsk-tsk those know-it-all engineers who don’t rely on common sense.  But eventually the Senate and House subcommittees adjourn, the circus leaves town, and the government engineers can talk to the auto manufacturer engineers about actual engineering.  But I’m starting to get a little nervous about this whole “we need more competition with health insurers” thing, because I don’t see any dissenting voice from either party.

I’m starting to worry that legislation that artificially expands the number of health insurers in any given market might actually pick up sufficient traction in an election year.  I hope I’m wrong.

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234 thoughts on “Increased Health Insurance Competition Doesn’t Do What You Think It Does

  1. Small businesses and individuals should be allowed to enter larger pools — making the cost less expensive like a universal healthcare would have done over time.

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  2. I’ll see if I can muster up a post on this, but in short, you’re right that increased competition in the context of the system we have would more likely than not lead to higher prices (until or unless something else changes). The problem is that any individual change won’t work until or unless it is accompanied by a host of other change. Not only is radical change scary*, I am currently convinced that the biggest changes required come not from the system, or government, but from ourselves.

    * – Note, single-payer doesn’t qualify as “radical change” in the context I am thinking of – a part of the reason why I don’t necessarily think it would be disastrous, but also don’t think it would solve our problems (unless it became so disastrous that something had to be done).

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    • I still lack the confidence that this can happen. I don’t know if it has more to do with human nature, or what our stem engenders, or both, but I have yet to see any evidence that people make economically sound decisions when it comes to their healthcare.

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      • One way or another, we’re going to have to, though. Either through ourselves or through the government. It’s not clear to me why we cannot be trusted with the former, but if we do so through the latter it will work out. We can say “well, through the latter, we are trusting the experts.” Except we don’t trust the experts. Except providers, who are iffy (at least, not when it comes to the cost/benefit calculations).

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  3. There is the Japanese solution, where all the insurance companies sit down with all the provider organizations and agree on a standard price. Of course this is totally unamerican to do this, but it appears to work in Japan. Or alternatively just say everyone pays the medicare price for care. No other rates allowed, so if you don’t like it as a provider you can just go out of business.

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    • Provider organizations negotiating is not that different from what we have now, except that it would give providers even more leverage than they have at the moment.

      Price controls are rather problematic. Too many people would be willing to pay more to get more, for one thing. People with insurance enjoy preferred service over Medicare and will object considerably to being put in the queue with everyone else. And a lot of doctors would indeed retire, creating some at-least short term problems.

      France has some price controls, though even there, they nudge rather than force it (basically, you accept the standard price or you have to post your price for all the world to see, as I understand it). French doctors are also willing to work for considerably less than American ones would.

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      • “French doctors are also willing to work for considerably less than American ones would.”

        This is something I’ve always found very interesting. It seems that part of the reason healthcare is so expensive in the U.S. is that we have lots of wealth in doctor groups, hospital groups, pharma, etc–more so than countries with UHC. Profits aren’t a bad thing, mind you, as we also have (arguably) the best medical care and research in the world. But I’m wondering if this “going into the healthcare industry to make lots of money” idea is something unique about American culture? Or is it simply a matter of our more-privatized market and the inefficient incentives we have set up with fee-for-service and no rationing?

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        • Or is it simply a matter of our more-privatized market and the inefficient incentives we have set up with fee-for-service and no rationing?

          The incentives are ghastly. Everywhere from payouts to defensive medicine to the enormous gap between specialists and primary care physicians (often, unfortunately, leading the latter to either get in bed with the former or try to close the gap on their own – both bad for the system). My wife was invited for job interviews for FP/OB jobs paying anywhere from $120k to $375k. When you’re swimming in $100k of student loan debt, that latter starts looking awfully attractive, even though you look at it and know it’s not the kind of medicine that you want to practice. You see these profit models and a level of temptation I think that doesn’t exist elsewhere (my wife did not yield to the temptation).

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  4. Two things.

    1) In theory, at least, reinsurance provides a potential market solution to the law of large numbers problem.
    2) I’m not saying what you say about insurer as financial advocate isn’t true (indeed, I think it is, at least to some extent). However, if it is true, what your describe is not strictly speaking a free market. It implies that the market for health care is an oligopoly (and, at least in the “few insurers” case, also an oligopsony).

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    • But reinsurance tends not to pay out in reality. In insurance businesses where reinsurance is used, what really happens is that reinsurers are speculators, basically hedge funds in all but name, inadequately capitalized and located in tax havens. When it comes to the crunch, they just go bust, often leaving the primary insurer to carry on business as usual and the claimant without a chance of getting their money. Not likely anyone would accept this in healthcare.

      Regarding the nature of the healthcare business – free market does not imply perfect competition, even in the absence of interference. Many businesses have structural characteristics that prevent perfect competition from emerging. Health provision is clearly a case of monopolistic competition at least – doctors and hospitals are clearly differentiated on several axes.

      What Todd is saying is a bit more interesting – it implies that health insurers actually face a downward sloping supply curve. ie. Its much more expensive for them to sell a small amount insurance than to sell a lot of insurance. In the extreme case, it means the equilibrium price for any given insurer may be undetermined.

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        • I can try – the thing about reinsurance isn’t that interesting. Basically reinsurance is when an insurer insures themselves against having to pay claims. In theory there’s nothing wrong with this if everyone has the right information, but in practice you have to question why its being done. Its not unlike slicing and dicing mortgages, really. You’re the insurer, you have access to the clients and good actuaries, why do you need insurance? In practice, its very risky to sell reinsurance policies and the companies that do it are a bit dodgy. I doubt reinsurance would solve the basic problem Todd indicates that the insurers costs shrink as the size of insured pool grows, because reinsurers would be unlikely to be able to put together good pools.

          In terms of conventional economics the effect of pool size is quite interesting. “Normally” a firm in a given market will generate more demand by lower prices, but it can’t lower prices below its costs with ceasing to make money. If the effect Todd describes actually dominates insurer’s pricing, it means their costs shrink, maybe dramatically, as they reduce their prices because the pool size grows. This is an example of increasing returns to scale. Its rare to see this in a purely financial business – its more common in large scale industry where its limited by other effects.

          Such a pure example of increasing returns (if indeed it is one – I don’t know much about the business but what Todd says sounds plausible) has interesting implications. For example, there may be no single optimal price for an insurer to charge. There may really be many possible prices, each producing a different sized pool of insured but the same profits for the firm. Such cases upset the assumptions of welfare economics that say competitive markets maximize welfare. In this case, actually, clearly, the welfare optimizing scenario is to have a single insurer cover everyone (heresy!) If forced to compete, firms will face an incredibly strong incentive to divide up the client base so each one gets a pool large enough to keep it in business, and invent structures to prevent price competition, which is indeed more or less what we see.

          Its important not to confuse the fact a market is a natural monopoly (as this may be, or at least a natural oligopoly) with the idea that its not a free market. The one is to do with the incentives firms face due to the nature of the business, the latter to do with legal restrictions on competition. In fact, the closer a business is to perfect competition (the opposite of a monopoly), usually the more legal restriction we see.

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          • You may be right, in practice, that there’s no good way to solve the risk pool problem with reinsurance.

            You’re right, I should have said perfect competition. The point, though, is that it violates the assumptions that lead to Pareto efficiency in free markets.

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          • I don’t see any theoretical reason why reinsurance wouldn’t work. I mean, it’s basic statistics. If you take a bunch of insurance companies with a positive expected profits but high variance and aggregate them, you should get a pool with positive expected profits and and lower variance. Provided, of course, that the returns of the individual firms aren’t strongly correlated.

            With certain types of insurance, I can see correlation being a problem (though it could in some cases be mitigated through geographical diversification), but it doesn’t seem like that would be the case with health insurance.

            If reinsurance tends not to work well in practice, it’s worth asking why that’s the case, because there’s no obvious reason it shouldn’t.

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            • There tends to be an adverse selection problem in practice with re-insurance as its actually done. Insurers and reinsurers have the same actuaries and the same access to capital, but insurers have more data about their liabilities. The only reason they seek reinsurance is because they think they’re inadequately capitalised for their risk exposure but don’t want to lose the profits associated with it. There’s no other reason to seek reinsurance – reinsurers don’t really offer any additional risk bearing potential, just the illusion of it, and insurers don’t need to recycle a limited supply of liquidity the way banks do.

              I guess in health insurance, I can see where there is a reason to re-insurace – because the insurer has too small a pool of clients. A reinsurer then becomes in essence an aggregator. But then what value does the primary insurer actually add? The reinsurer will want the primary insurer’s risk profile to meet some specific standards so it can be pooled with others. In the end I suspect the primary insurers would end up homogenized because of the needs of the reinsurers to standardize their exposure.

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  5. This is a very interesting post. It leaves me with a question, though. During the health care debate in 2010, it was pointed out that some states have an effective monopoly (Maine and Alabama were cited as particular examples, IIRC). Many other states have just a just a couple of insurers that dominate 80% or more of the market. Those states haven’t fared any better controlling costs and tended to have worse health care inflation than those with more options available to consumers.

    That may not be an an entirely accurate recollection – but I don’t think it is far off. That said, this appears to be a completely broken market where more competition = market fragmentation that can be exploited by providers to inflate costs , and less competition = insurance monopolies/cartels that lose their incentive to control their operating costs (if not increase profits, as argued in the OP).

    If this is the case (and I have never seen any evidence that it is not), then what is the argument in favor of private insurance companies? What are they bringing to the market that is of enough value to justify their drag? Sure they are good at rooting out fraud and abuse, but what is the real cost/benefit of that?

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    • I can’t necessarily address this exact point, because I don’t remember seeing this particular point in the debates. I do, however, remember being irritated that both sides clearly had no idea how health insurance worked* and were making claims that, while supported their cause, were wildly false.

      *I should say that it is my understanding that there are actually many pols on btw sides that understand how health insurance works, especially the leadership and proper committee members. But from what I understand, there is a greater desire to win the day than educate the public, and so the theory is to find the talking points that move people, regardless of truth, and stick with them.

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  6. Focusing on insurance as a way to control costs is probably a mistake, because as you pointed out, they are just a pass through. If everyone was self-insured the overhead would be eliminated entirely (the same as a perfectly efficient insurance system), but nobody would be inclined to think health-care costs could be lowered if everyone twiddled with ho they stacked their money under the mattress.

    The power to negotiate prices in large blocks is just centralized bitching instead of each person bitching at their doctor or nurse directly. In effect, it’s turning the doctors into a type of insurance pool, where patients getting different levels of attention (due to differing practices, different times of day, different backlogs in the waiting room) all pay the same rate for their very individual experiences simply because the basic condition shares the same set of check-boxes on a form.

    To actually save money (reducing the percentage of GDP spent on health care), the amount of money going to health-care providers and that sector of the economy must be reduced. To retain the same level of care, they have to become more efficient and reduce staffing (their productivity must increase) or their pay must be reduced.

    There have been attempts to rein in the costs of malpractice insurance, but that insurance is also just a pass-through for money being paid to patients with bad outcomes. If you think of these patients as totally non-productive but very highly paid members of the health-care sector, capping or eliminating malpractice suits is like firing no-show middle-managers. It will save a little money off the top, and under a nationalized system would certainly be implemented to some extent under sovereign immunity, but it wouldn’t be enough to bring US spending in line with other nations.

    The best approach is probably to keep making incremental efficiency improvements across the board, from increasing the automated levels of diagnostics (scans and tests), to having everyone zap their health history to the receptionist via an iPhone ap instead of filling out the same four pages of paper forms for every visit. Do we really need nurses who spend their entire day walking each patient from the waiting room to a particular examination room and taking their blood pressure? Couldn’t each patient be handed a device that both takes their blood pressure and guides them back to an examination room? On the way, the patient could walk across a scale and pass a camera that records their height, avoiding yet another minute the nurse always spends on the way to the examination room.

    In the future, all restaurants will be Taco Bell, and so will the hospitals.

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    • “Focusing on insurance as a way to control costs is probably a mistake, because as you pointed out, they are just a pass through”

      This. I had actually had it in mind to say this directly when I wan in the car deciding to post on this subject, but forgot to spell it out when I sat down to the keyboard. This whole comment did it for me wonderfully. Thanks.

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  7. Good post. So what is your take on the common Repub argument for letting insurers compete across state lines as a way to reduce costs/ increase competition? The main arguments against that line seem to me to be that it would likely lead to violations of anti-trust laws and/or a race to the bottom, in terms of insurers migrating to states that have the weakest regulations (as happened with finance.) There’s also the fact that there are still huge insurers (UnitedHealth, Well Point, Aetna) who merely set up sub-groups in each state, so it’s not likely we’ve created a fragmented market by not letting insurers compete across state lines. But I’m curious to hear your take.

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    • Well, I should note in full disclosure that my firm would stand to gain significantly over our competition were this to happen, so I am clearly unbiased.

      That being said, I don’t have a problem with it, and would encourage it under the right circumstances. Anti-trust issues may be relevant, but the real reason both health and workers comp insurance go by state is that the states do not want to have to give up their rights to dictate policy. Oregon, for example, has had a most of the things that PPACA has that people say they want (e.g.: pre-existing condition legislation) for years, and doesn’t want to give it up – while Texas thinks those kind of consumer protection laws are sissy and business killers.

      But it has never been there feds that didn’t want national health insurance plans, it’s always been the states.

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  8. Some good points above already.

    I also think point 1 is overstated to the extent that there are factors other than negotiating leverage in insurance pricing, some of which are inversely correlated with size, like ability to innovate and control overhead. Big, slow companies might have more leverage, but they also incur enormous opportunity costs through institutional inertia.

    There’s also an important distinction between “increasing the amount of competition in a market” and “increasing the number of competitors.”

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  9. I love your stuff, Tod, but I take exception to all kinds of things you’ve written here.

    First, I disagree with the size issue. The cost of health care in the end is a factor of what it costs to deliver it. If one of us is insured with a big company and another isn’t, I can see where the bigger company may be able to use leverage or economy of scale to force the provider to shift costs to the lower powered organization. This is just zero sum cost shifting, Peter is taking from Paul. Society does not gain from this with lower premiums. The bigger effect is the lack of competition between providers for efficient services at minimal cost. Somewhere there is a balance point between economies of scale and constructive role of healthy competition for customers. My guess is health care should have a dozen or more major players and a myriad of smaller start up competitors for best results.

    If your concern is that the care providers will use their power over small insurers to extract higher profits, then you are just ignoring the effects of higher profit margins to attract new health providers.

    On the benefits of larger risk pools, again there are economies of scale. But the United states has a lot of people. Again if the market looked like auto insurance there would be a few huge players, a dozen or so bit players and bunches of smaller players.

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    • If your concern is that the care providers will use their power over small insurers to extract higher profits, then you are just ignoring the effects of higher profit margins to attract new health providers.

      This runs into the lack of providers overall. I think people overstate (by about 500 miles) the degree to which the doctor shortage is just a ploy to reduce supply so that they can ramp up fees, but it does stand in the way of reforms that might work if there were more providers to play against one another.

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      • Roger, I’m going to agree with Will here. To what extent are there reasonably competent medical practitioners who are not medically certified? To the extent that mandatory certification creates barriers to entry, does lowering said barriers increase the supply of competent practitioners? Finally, it seems that the thing that really limits the supply of competent medical doctors is medical schools. Are there for profit medical schools? AFAIK the ivy leagues are private and for profit. What is preventing them from taking in more students? Or are they already taking in all interested students who are sufficiently competent? Or maybe they are turning away students because they lack resources. If there are limitations on non-monetary resources, or they are unable to further increase the fees because fewer people will take up larger student loans, there are real factors which make the supply of competent doctors sticky upwards which are n.ot just a product of the AMA.

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        • The Ivy League schools are private and non-profit. For reasons that aren’t entirely clear, and probably path-dependent, for-profit colleges in the US operate pretty much exclusively at the low end of market, taking non-traditional (i.e. older and/or part-time) students and those who couldn’t cut it at a regular university.

          I remember hearing somewhere (don’t have a cite and can’t vouch for this) that the real bottleneck in the doctor supply is the number of residency slots available.

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        • Will and Murali,

          I will admit that to the extent we have a completely artificial and perverted market that is not free or flexible enough to respond to market forces, that my market dynamics argument would fall flat. It becomes a zero sum struggle for the biggest share of the goodies. If this is Tod’s argument, then you are better off aligning yourself with the baddest mother fisher in the valley.

          If this is the case, I am going to Costa Rica for all my non emergency care. I can fly to a relatively free market for less than one nights stay in a hospital. Medical tourism is the next growth industry. Invest now!

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          • I’m not sure that medical education (inclusive of resiency period) can ever be responsive to market forces. If, as Brandon mentioned, private non-profits are able to bring in more money via donations than for-profits, and especially if margins for universities are already slim, the responsiveness of the medical university system to producing doctors when doctors’ pay increases will be severely limited.

            That doesn’t mean that the system can’t be reformed to take advantage of market forces to cut costs. I just think that the health insurance angle is a red herring. Insurance as a payment method does a poor job of containing costs.

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          • There are huge barriers to entry for being a doctor. Some of them are necessary to the profession (like training).

            If there weren’t, why aren’t you a doctor right now? It pays well.

            I personally wouldn’t want my doctor to be in it just for the money.

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      • Will, there is a long-standing argument over the role of nurses and physicians assisstants in health care. There are a lot of things they are competent to handle that they are prohibited from doing because by rule it has to be done by a doctor. That’s a big part of the supply issue, and a part that plays a role in the price of health care. There is a fair amount of cartel like behavior in the medical professions.

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        • MLP’s have a pretty large amount of leeway these days, despite the best efforts of some within the medical establishment. The problem is what they can’t do on their own, not because the medical establishment won’t let them, but because they can’t. They have a lot of support in our neck of the woods, in large part because they alleviate the burdens of the regular docs. But there’s a shortage there, too. And a whole lot of patients who refuse to see MLP’s (It’s a $20/$40 copay either way, so they feel like they are paying for a full-blown doctor). Of course, right now, the hospital can’t attract a full nursing staff, so there is a reliance on MA’s, who are even more limited in what they can do (and not without reason).

          Anyway, at the end of the day, the MD restrictionist establishment has lost most of the battles. DO’s are accredited just like they are, MLP’s are given pretty broad leeway, neuropaths can apparently write prescriptions, and at least in the primary care realm the doctors are aching for the help. One of the big remaining battles is midwifery, which varies wildly from one place to the next.

          Not to say more can’t be done, but nothing jumps out at me as obvious (except maybe prescription refills)?

          I don’t disagree about cartel-like behavior, as long as we’re not calling the AMA a cartel (a pet peeve of mine).

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    • Roger, I think you’re missing Todd’s most interesting point about the size thing. Its nothing to do with larger insurers having more pricing power – that’s easy to account for. Todd’s interesting point is that a larger insurer can more accurately predict its costs and thus charge less, so they experience increasing returns to scale. Increasing returns undermine the normal arguments that more competitors are better for everyone’s overall welfare. This doesn’t change the fact that ultimately provider prices must fall if we want more healthcare, but it does impact how we would best get there.

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      • Simon,

        I agree that a larger risk pool allows more accurate pricing on the pool. A more accurate overall rate level reduces risk. Reduced risks, in a competitive market,will tend to lead to slightly lower required returns, as returns need to be adjusted for risk.

        My counter arguments:
        1) For this to be true it assumes we have a competitive market. In a monopoly market all bets are off. The insurer should increase premiums as much as it can get away with
        2) The scaling benefits diminish quickly beyond a certain size. Very, very quickly.
        3) The risk is more of a function of all lines of business in all states than it is per state. When I managed smaller insurance lines in small states, we were able to average the experience of all 50 states to reduce per state variability. I further averaged out the returns across all 12 lines of insurance that I managed in all 50 states. This leads to the opposite argument though, which is that what we need is to allow companies access to sell products in every state. This would increase competition and scale.
        4). Insurance rate plans are transparent. Competitors can and do study each others rating plans. In most lines (I never developed rating plans for health insurance and honestly do not know if it is true here) they even pool data to allow smaller companies to gain the economies of scale of larger companies. If this is not true in health insurance, then the proper retort to Tod’s claim is that it should be.

        The OP is at best half true and all wrong.

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        • I think the key here is your point 2 above. Why do you believe the scaling benefits diminish quickly in healthcare specifically? The law of large numbers means you end up with a normal distribution of monthly costs due to random factors if you have a large enough pool, buy my guess would have been that the pool needs to be very large for that to be true, given the very wide variability of medical risks between ages, genders, occupations, hobbies and genetic backgrounds.

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    • Roger:

      “The cost of health care in the end is a factor of what it costs to deliver it”

      Agreed. Arguing over who your health insurance carrier is going to be as a way to control costs overall is like arguing over whether you’re going to use your VISA or American Express to fly the family on a 30 day luxury European vacation you can’t really afford. But I was not arguing that keeping the number of insurers from mushrooming would solve the healthcare crisis; I was just arguing that having more wouldn’t solve it.

      “If your concern is that the care providers will use their power over small insurers to extract higher profits, then you are just ignoring the effects of higher profit margins to attract new health providers.”

      No, actually, you are ignoring the way it actually works. The capital costs to set up new provider networks from scratch are astronomical, and consequently it never happens. Instead, larger networks eat smaller networks and become larger. I get that what you’re describing should work in theory, but in practice you get continually fewer larger providers.

      “On the benefits of larger risk pools, again there are economies of scale. But the United states has a lot of people. Again if the market looked like auto insurance there would be a few huge players, a dozen or so bit players and bunches of smaller players.”

      Again, health insurance companies do not function in the same capacity that an auto insurance company does. It is a pass through service model, not a capital investment model. Extrapolating what works for one to the other will get your foot shot off.

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      • Thanks Tod,

        I really appreciate learning about industries which I am less familiar with. I have never designed a rating plan or managed the underwriting process or the provider network for health insurance.

        Can you clarify something though, as we may just be talking past each other…

        What do you mean by “legislation to artificially expand the number of insurance companies in any given market?”

        I agree that any legislation to artificially increase the numbers of companies is mega super duper stupid. I think increased competition and freedom to compete across state lines is brilliant. These are two very different concepts. Do you agree or disagree?

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          • I would hope to God that no one would be dumb enough to break up insurers into Baby Bells.

            I don’t think that’s on anyone’s agenda. I think it’s much more along the lines of what Roger is talking about.

            The potential downside to interstate insurance sales is that it would become like credit cards, where everyone sets up in the state(s) of least regulation. This isn’t necessarily a bad thing, and there are ways around that, but it’s why a lot of people oppose it.

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            • I would strongly encourage the removal of any interstate barriers. Even more importantly, I would encourage freedom in the terms of the contracts relating to limits, deductibles, what is covered and excluded and so on.

              Tod, do you agree or disagree?

              BTW, Tod, do health insurers share actuarial data like personal lines carriers?

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              • I would strongly encourage the removal of any interstate barriers.

                I’m told that if California were an independent country it would be the seventh largest economy in the world. Given that market size it’s hard to imagine that they significantly suffer from lack of competition due to interstate barriers. The only effect (I hesitate to call it an advantage) I could see from such a move would be to emasculate the state insurance regulations. Is it your intent to nationalize insurance regulation?

                Even more importantly, I would encourage freedom in the terms of the contracts relating to limits, deductibles, what is covered and excluded and so on.

                Perhaps. But the coverage mandates were implemented in response to very real problems that resulted from the lack of such mandates. Perhaps the mandates didn’t help, or perhaps they had unintended consequences or whatever, but the underlying issues will remain.

                You know… insurance is an extremely complicated product. It’s practically impossible for the consumer to judge their individual risk profile for thousands upon thousands of possible ailments and their consequent financial exposure. Anything that can simplify that process should count as a public good. At the very least there ought to be statutory definitions of what counts as “full coverage”, “comprehensive coverage”, “catastrophic coverage”, etc. so you could at least be comparing apples to apples.

                You also need to step back from the specifics and remember why we’re having this debate in the first place. People without insurance or who have insufficient coverage directly or indirectly shift that burden onto others. Unless you’re in the let-em-die! camp–and I don’t perceive you to be so–allowing maximal personal liberty in this market amounts to endorsement of negative externalities. It’s just unavoidable.

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                • Rod,

                  Thanks for the dialogue,

                  How does the size of California benefit the citizens of Rhode Island under your scenario?

                  The regulations of the various states are often a rube goldberg complex of screw ups on top of screw ups magnified by various rent seeking arrangements of special interests. Yes, I would encourage states to not limit deductibles, to not mandate coverage that customers do not want to pay for and so on. I guess you could say that I want to emasculate the perverse interferences of the market, yes.

                  “the coverage mandates were implemented in response to very real problems that resulted from the lack of such mandates. Perhaps the mandates didn’t help, or perhaps they had unintended consequences or whatever, but the underlying issues will remain.”

                  I am sure some regulations are indeed based upon real problems. Many of them are based upon the rent seeking activities of insurers, provider networks, doctors, attorneys, pharmaceuticals, and busy body politicians.

                  I wholly endorse transparent definitions and publication of such terms as you suggest. And I am well aware that some types of practices are predatory. I am OK with prohibiting these. It doesn’t take thousands of pages of insurance regulation to spell out prohibitions on predatory practices.

                  My recommendation in Murali’s OP yesterday of the day before clearly reveals that I agree that whatever we do needs to both improve the market in health care and maintain safety nets:

                  1) I would recommend exploring ways to establish catastrophic care for extremely serious and expensive medical conditions. I would allow people to opt out of this with some very onerous requirements. This would be paid for via payroll taxes unless the fool opted out.
                  2) I would recommend people buy their own insurance that meets their needs for routine, non catastrophic care. I would choose a high deductible and low premiums and few frills. Others can get low deductibles, high premiums and all the frills they would like. I would allow any company to sell any policy that people will buy as long as the company is honest and has proper reserves.
                  3). I would encourage experimentation with guaranteed insurability and portability, so that people would not be harmed on their routine care premiums if their health status changed.
                  4). I would subsidize the poor and elderly and possibly the sickly so that they could purchase the underlying coverage policy and pay their deductibles. Catastrophe coverage would be free for those not working, as they would pay no payroll tax.

                  So, my question is, How would you agree or disagree with this recommendation?

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                  • Roger,

                    How does the size of California benefit the citizens of Rhode Island under your scenario?

                    It doesn’t; that’s not the point. The point is that we already have 50 states with 50 sets of insurance regs from very restrictive to very lenient, 50 different population bases from a few hundred thousand to several million, and 50 competitive scenarios ranging from very competitive to oligopolies and near monopolies. We’ve experimented out the ass with all kinds of models like HMO’s and PPO’s and HSA’s, etc. Federalism, baby! And NONE of them work very well.

                    The one thing that hasn’t been tried, even on the state level because it’s not allowed by Federal law, is single-payer. Vermont (and another state which I can’t remember right now) wants to and is seeking a waiver. Why not let them try??

                    So, my question is, How would you agree or disagree with this recommendation?

                    I find it interesting that much of what you outline above is actually very similar to Obamacare. In particular isn’t point #1 a mandate? #2 is basically the state exchanges. #3 is the pre-existing condition thingy from Obamacare. And #4 is the subsidies that are also part of the state exchanges.

                    The main difference is that it looks like you would get rid of Medicare and Medicaid in favor of the subsidized premiums support?

                    Anyway… it occurs to me that a lot of what separates the libertarian/conservative position from the liberal position is a matter of priorities and angle of attack. I think it’s fair to say that liberals see access as the fundamental goal with costs being driven in large part by rent-seeking on the part of insurers and providers driven by inelastic consumer demand. We also see free riders on society’s moral sympathies as a huge problem, hence the mandate. On the other hand, libertarians and conservatives seem to be focused on the cost angle being driven by lack of competition and a free market.

                    Liberals see increasing access to basic and preventative care being key to driving rationalization of usage (clinics and Dr.’s office vs. ER) and reducing unnecessary costs. Libertarians and conservatives see reducing costs through competition as key to expanding basic access and reducing the need and cost of subsidies.

                    I can see your prescriptions being better than what we currently have, but I also see it mainly helping those who are already doing OK. One thing I’ve noticed here at the LoOG is that is seems to be a distinctly upper-middle class crowd. Doctors, lawyers, college professors, software developers, etc. I think it’s fair to say that I’m not exactly poor by statistical standards but nowhere in the same… well, league. Take HSA’s for example. If you’ve got a decent income to start with that can make a lot of sense. But if you’re just barely making it… not so much. To start with, the tax advantages are simply non-existent at my income level.

                    Right now my insurance premiums through work (the “basic” family plan for health, dental, vision, and scrips) is my largest monthly expense. Yeah, it’s more than my mortgage even. I’m not complaining; it paid for cancer surgery and chemo–saved my wife’s life–but still, it’s a hell of a bite.

                    I don’t know… I’m kind of running out on this comment. But I guess I’m saying that a lot of the discussion assumes situations that are really only true for a minority of families. We’re not all doctors and lawyers and such and what works for you doesn’t necessarily work for the other 80% of us proles.

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                    • I’m relatively sure Vermont will get their waiver, at least provided Obama gets re-elected (which I think he will). I will be interested to see how it works out. (If it does work out, or seems to, I’d like to see it rolled out to larger states before something national is tried.)

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                    • Will, that’s how Canada’s system developed and continues to work to this day. It was started in one Province and worked so well that the rest followed suit in fairly short order. AFAIK, they actually don’t have a national level plan, just the provincial plans that reciprocate and work together.

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                    • Rod,

                      The point is that it is absolutely nothing like Obamacare. The differences are that it is 1) voluntary, 2) it reconnects paying for and receiving benefits and3) it separates rather than merges insurance from income transfers / safety nets.

                      What I laid out is a program that is the absolute antithesis of Obamacare. It would provide insurance to all, it would drastically reduce costs and it would not be coercive. It is the trifecta of health insurance.

                      My plan deals with your concern for access for all. It addresses rent seeking in the routine care segment via competition and choice. And my plan addresses free riders from every aspect.

                      I have no idea how my ideas help the well off better than the average bloke. Lower premiums and guaranteed catastrophic care help the working poor more than the working wealthy. My plan is actually sustainable for retired and unemployed and poor. This means I offer a plan that will actually be there as opposed to a dream.

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                    • Sorry Roger, I’m with Rod. If you take the basic premise of your points, write up actual real life law to implement them, run that through the real world politic engine and add what’s necessary to pass them through Congress you pretty much end up with something awfully close to Obamacare.

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                    • So if you start with something that solves problems and let politics take out all the parts that solve the problem and substitute in things that make the problem worse, you get Obamacare.

                      And you guys still think it is a good idea? How so?

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  10. I see increased competition as something that would lead to fewer, nationally competitive insurers, not more. Increased competition simply means fewer restrictions on insurers. You’d see lots of insurance companies die or get gobbled up by the big ones and those big ones would compete pretty much against one another. Competitive insurance plus reinsurance seems to work well in some European countries.

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  11. A candidate’s age might have an adequate effect on the cost of coverage. Nearly all more youthful individuals have minor difficulties with health problems. These could include the common cold, small accidents, ear infections, a flu, etc.

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  12. I expect politicians to say fabulously ignorant things, like the heavier a vehicle is the less likely you are to be injured in it at high speeds.

    I’m pretty sure that that’s correct. I get the physics argument—all else being equal, a heavy vehicle has to dissipate more energy—but all else isn’t equal. Heavy vehicles are heavy because they have more metal, which means more material available ot absorb that shock. It’s not that adding weight makes a car safer; it’s that making a car safer adds weight.

    The research I’ve been able to find backs this up, though driver characteristics are an obvious confounder, so it’s not conclusive.

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    • The critical factor in serious injury to a person in an automobile in an accident is ride-down distance — contrary to decades of advertising, it’s dv/dt that kills, not speed. All things equal, the larger vehicle has advantages for increasing the ride-down distance — larger crumple zones, larger passenger compartment, greater mass to push the other vehicle out of the way, etc. But all things shouldn’t be equal — the optimal strategy for a small low-mass vehicle is not the same in that accident. An ultra-rigid passenger compartment allows the smaller vehicle to make use of some of the larger vehicle’s crumple zone. Alternate controls, such as drive-by-wire with a sidestick instead of steering wheel and pedals, make a large difference. Secondary factors like inflating seat belts that spread that part of the impact over larger areas help. And for anyone who’s watched NASCAR recently, some sort of head restraint can make an enormous difference — you may get a concussion, but you’re not going to snap your neck.

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  13. How certain are you that this is how things actually work, Tod? Because this isn’t actually how I would expect things to shake out.

    In your model, firms see losing money as an unacceptable risk, so they set prices as high as they need to to guarantee that they don’t lose money. This is perfectly sustainable as long as everyone else does the same thing.

    But suppose a new firm comes in, and that firm isn’t as risk-averse. This firm is willing to risk losing money in exchange for higher expected profits. Why? Because its shareholders are diversified. Like venture capitalists, they don’t need every single investment to pay off—they just have to pay off on average.

    So this new firm lowers its rates and captures a bunch of customers from the other insurers, who are then forced to follow suit to avoid losing all their customers. The model you’re describing to me—where there are a bunch of insurers who charge enough to generate very high average profits in order to rule out the possibility of losing money—just doesn’t sound sustainable to me.

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    • I am very, very, very sure I know he way this works.

      You are making the common mistake of thinking that health insurance is a capital investment model, like auto insurance, where you start out and gamble a large sum of money in the hopes that you can grow it.

      It is not.

      Companies that regularly do not collect enough money to pay for claims go out of business very, very quickly.

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        • Certainly not like the theoretical competitive market conservative like to invoke. Consider the numerous conditions that economists require for a market to be competitive (eg, first semester PhD micro rather than first semester undergraduate). High on that list is that both producers and consumers are price takers — their individual choices don’t affect the price of a service, and all purchasers pay the same price. Medical care is far from that. As an aside, it is interesting that in first semester PhD micro, you spend a week showing that competitive markets under a bunch of assumptions can deliver optimal results, then spend several weeks showing that every single one of those assumptions is necessary.

          Some years back, my 17-year-old daughter had a kidney stone broken up and removed. Due to some sort of bureaucratic oversight, I got copies of the paperwork that showed what the insurance company was charged versus what I would have been charged without insurance. $51K for me, $17K for the insurance company. So long as there is a 3:1 range for the price charged for an identical service, it is inconceivable that there can be a well-functioning market for that service.

          Anecdotally, a friend who used to work in a hospital business office once told me that, should it ever occur that I had to pay for a surgical procedure myself sans insurance, no matter what the bill said, go see the business office manager — not a clerk — and offer him/her 25% of the amount on the bill in cash or a certified check. My friend said they would almost certainly accept that and stamp the bill “Paid in Full” because 25% is the maximum for which they can sell the debt to a collection agency.

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      • What is the salient difference between health and auto insurance in this context?

        Companies that regularly do not collect enough money to pay for claims go out of business very, very quickly.

        Right. I’m not talking about an insurer that would regularly run losses. I’m talking about an insurer that can expect to run profits on average, but has a high enough variance that it may lose money some years. It seems to me that a +EV bet is a +EV bet, and that’s not going to change just because it has a bad year. If it loses money the first year, it still makes sense for investors to put more in to keep it going, assuming that the actuarial model is sound.

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        • Actually, a standard insurance market can go a couple of years under collecting. In fact, most of them do cyclically. If you have enough reserves, you’ll undercut your competition and grab market share, and adjust before your claims tail gets too big. You can’t do that in health insurance, because you’re not investing capital, you’re charging a fee for a service.

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              • Though there are related lines, such as disability insurance or those AFLAC cancer-add on coverages that can do that kind of investing.

                The problem with doing any kind of straight heath, catastrophic or otherwise, is that the once the doors are open for business the claims are a steady stream, unlike other lines where the claims are unanticipated.

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                • The problem with doing any kind of straight heath, catastrophic or otherwise, is that the once the doors are open for business the claims are a steady stream, unlike other lines where the claims are unanticipated.

                  How so, with catastrophic plans? The steady stream seems most tied with the maintenance side of things rather than the large claim side of things.

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                • Sorry if I seem a little dense here, but I’m not sure I get the distinction.

                  I would think that any kind of insurance risk will be paid off as a steady stream given a sufficiently large risk pool, and adequate analysis of the risk. So, for instance, life insurance is not a steady stream if you ensure one guy, but it will be if you insure a million.

                  Can you elaborate a little more?

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          • Tod,

            You may already have explained this, but if so I beg you to humor me. Why is health insurance fee for service and not an investment model like auto insurance? Does it have to do with health insurance covering regular “maintenance” in a way auto insurance doesn’t, so that there are more regular outlays of cash than in auto insurance?

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            • There are different theories on this, and probably all of them are true simultaneously. One is that health insurance as we know it today is an evolution of what might be better called a hospital subscription service. You paid a hospital X number of dollars a year, and they agreed to that you if and when you ever got sick, so long as you were still a subscriber. When hospitals began separating the financial mechanism to expand beyond their own client base, they marketed it to large employers. Which is why our system today is set up to revolve around employer based groups and not individuals. All of which is to say that part of the reason it’s that way is that’s just the way the guy that did it first did.

              But it is doubtful that even if we were to scrap the system and try again, we wouldn’t make it resemble the standard insurance line model, because each is designed to do different things in the aggregate.

              Your home insurance, for example, is anticipating that your house will never, ever burn down. It is gambling that it will never have to pay out a claim, except in an extreme and unlikely scenario. Health insurance runs on the opposite assumption. Unless a piano falls on you (to quote Russell), the assumption is that you will require massive expenditures for your medical needs. Maybe not this year, but eventually – and since you pool everyone together, they are always paying claims. Medicare has actually sheltered us from a great deal of the cost by taking the most expensive group of people and heavily (and I mean HEAVILY) subsidizing their treatment. But at the end of the day health insurance costs what it costs because that’s how much people are paying for health care right now, this year.

              So you could set up a system where you’re risking capital that you invest, but in order to do so you need to collect more capital than you’re anticipating to pay our in claims, the way an auto insurance company does. But that means instead of charging you, say, $600 a month they’ll be charging you $900 a month. So there’s no real market for it.

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            • I think that’s what Todd is saying, yes. Quite a lot of what health insurance pays for is provided on demand, there’s no need for any predictable adverse event to really have occurred. So I expect health insurers see a rightward skewed distribution of claims ie. they can be more confident of the minimum they’ll have to pay out every month than of the maximum. I doubt this is the case or auto insurance, since auto accidents are much closer to genuinely random events.

              You can see how this would have a big impact on how you would structure the business. If you’re 90% confident of having to pay at least, say, 70% of your average outlays every month, there’s no much scope for temporary price cuts in the hope you can rebuild your capital later.

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      • By the way, I’m not questioning your understanding of the insurance business as it is. It’s just not clear to me whether you’re describing a phenomenon you’ve actually seen, or extrapolating to something that doesn’t actually exist in the real world.

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          • Sounds like a good idea but it won’t change anything while the insurance firms play little games with the Life Pool numbers. They want to put the entire Great Lakes into a zillion little water glasses and treat each as if it were a lake.

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          • See, you’re thinking as if the insurance firms would look at their insured and say “Oh goody, we’ve got a million people covered, we’re able to apply our empirical stats and do predictive work and derive expected values. Let’s call up the Sales Department and put on a big ad campaign with the slogan ‘Cheaper Insurance through the Power of Large Numbers.'”

            No. This will never happen. Though the insurer does have a million people covered and is doing his EV calculations, that’s not the way it’s priced. The insurer blinks at the would-be insurance applicant and says ‘Gosh, it’s just you, huh? I sure wish there were more of you, so I could charge you less, so I’m afraid I’m going to have to charge you a great deal of money.” — as if this insurer only had one customer.

            Do you see where the innumerate bafflegap enters this story? It wouldn’t matter if they sold in every state of the union. They’re all playing this game and will go on playing it until they’re all obliged to play in the same pool.

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                • No.

                  I am retired. Before that I was responsible for the creation, design, pricing, underwriting and marketing of insurance products for one of the largest insurers in the US. I was responsible for just about every personal lines product in just about every state at one time or another. My guess is that quite a few commenters here own policies which I designed. But I have absolutely zero experience in health, life or commercial. So I value your experience. If you say health insurance is different, then I trust you.

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                  • OK, three things:

                    1. I can’t tell you why, but it makes me enormously happy to see that someone else at the League is in insurance.

                    2. This makes me want to know what part of the county you’re in, because if I’m ever there I want to buy you beer.

                    3. Apologies for anything I might have said that came off as “talking down” to you. I’m automatically set to talk about insurance the way I do to my clients, so if I came off as sounding overly simplistic it was not my intention.

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                    • I split my time between Chicago, San Diego and the Big Island. I’ll buy the second round.

                      You never talk down to anybody. That is Blaise’s purpose in life. Seriously though, I have learned a lot from pushing on you and others in this thread. Sometimes it is easier to learn from a friendly push back.

                      I started by thinking I disagreed with you, and now I am pretty sure I actually agree with you. Good learning on my part.

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                    • Telling these folks the route to lowering prices is by opening up the trade to interstate policies… eet eez to larf. Who’s talking down to whom here? If you priced out insurance policies, surely you know about concept of a life pool.

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              • Point blank: yes, I am lecturing you on this. And I am dead serious. Anyone who would deny that health insurance policy pricing is based on anything but life pool size has no fucking idea what goes on inside a health insurance firm, is blankly ignorant of underwriting and has never seen an actual health insurance pricing model.

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        • This is true with any insurance, but it is far less so with health insurance.

          If you have an auto policy, for example, and you put someone in a wheelchair, you might have a $500,000 claim that’s paid out over a 40 year period. The auto insurer can invest that $500,000 over that 40 year period and make a lot of money.

          If you are put in a wheelchair and have to rely on health insurance, however, your premium pays only for the treatment you receive that policy year. The insurer has no obligation past that year. If you or your employer change insurers next year, the new carrier must pay those bills.

          A health insurer all indeed invest the cash, but it is a very short window of investment, and must be fairly liquid (as opposed to more standard lines, that often invest in things like real estate).

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          • I don’t know about all insurers, to be sure, but I do know Allstate and Blue Cross. Blue Cross, depending on the franchise, is usually not-for-profit, which is different than a non-profit, as I’m sure you know. Nonetheless, these franchises have substantial investment portfolios, especially in the bond market and preferred stock, which pays dividends. Having seen otherwise, I can assure you these investments are long term. Yes, they have to maintain reserves, but even those funds are on the float in money markets.

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    • Insurance incorporations don’t work like that. Prices are set on the basis of risk pooling. I sure wish people understood the nature of risk before they start opining on it.

      Risk can be evaluated with sufficient information. Risk decreases as information increases. Thus insuring one life is a different proposition than a hundred million lives.

      Want insurance rates to drop? Expose that market to more information. That’s why auto insurance can be priced on a per-life basis: any insurance company can go to the DMV and get your driving record.

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      • It’s not just information, Blaise. Even if all insurers had access to all the information that exists in all the insurance databases in all the world, larger insurers would still have an advantage over smaller ones.

        It’s all about the binomial distribution. Smaller sample sizes will exhibit more variability than larger samples drawn from an identical population. It’s true that over time it would all even out regardless of the subscriber base but the greater variability will require the smaller players to carry a proportionally larger reserve cushion. IOW, they would have to carry more capital reserves per subscriber to maintain solvency during bad years.

        The extreme of this is the case of a single person carrying sufficient reserves to cover themselves for any contingency. We would all have to have something like a million dollars in the bank to do that. Which is precisely why we generally (have to!) opt for insurance instead.

        Now there’s going to be diminishing returns to size in this. There’s probably a sweet spot somewhere between 100,000 and one million subscribers where the probabilities for all the low-incidence/high-cost sorts of things are predictable enough that more size doesn’t help much.

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      • Blaise, the statistics are a bit more grim for health insurance than auto. There are drivers who NEVER get into a wreck and /some/ who are accident prone. But no one gets out of here alive, so EVERYONE is bound to use health insurance. You think “better information” is going to solve this? Think again

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  14. Tod, good article in parts, but some of the things you said are simply unsupported by the facts. For instance I know I’ve already told you about Washington State’s fiasco with health insurance in which, guess what? ALL but two providers (Blue Shield and Group Health) of individual health insurance left the state and by 1999 they weren’t writing ANY new policies. Your perfect scenario no? Shouldn’t costs have dropped to bare minimums? I personally suffered through that mess, wealthy enough to buy a plan but due to selling my company, uninsured and unable to buy insurance as an individual. It was a stinking mess caused by politicians.

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    • You’re arguing against something I do no claim.

      As I’ve said elsewhere in the comments section, Ward, I do not think that lowering the number of insurance carriers will fix anything. Rates will continue to increase exponentially without some kind of dramatic reform.

      I’m simply stating that making many carries compete won’t actually solve the problem, and will actually make things worse.

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  15. Forgive me Tod for bad reading comprehension on these two phrases from your OP: Imagine: If there are two providers in your state and yours represents 50% of all the potential clients, most providers find that they are willing to come to the table and sacrifice a lot of margin in order to secure the rights to those clients.
    and:
    The fact of the matter is that the fewer health insurance carriers there are in any given state, the lower the premiums will be.

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    • That is true – because the fewer insurers there are the better the odds that they will get better pricing from providers. As I said, it still doesn’t address any of the fundamental problems with the system.

      Ward, you’re arguing that if we only had 20 companies offering VISAs instead of 2, your wife’s shopping accidents at Nordstrom would cost less. This is not the case.

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      • Tod, First there’s a rather comprehensive McKinsey study on health care here. Since I know you’re in the “biz” it is worthwhile reading if you haven’t seen it already. They partially buttress your argument about health care not following classical economics and competition rules in the US, but not for the reasons you state (although you took an interesting approach of oligopolistic market manipulation). The biggest problem with American health care is and always has been the disconnect between the patient who consumes the service and the entities providing that service paid for by (as you noted) a third party who is not incentivized to improve things. A step in the right direction was HSA (health savings accounts), which of course the Democrats despised to the depths of their beings and have been working ever since to destroy.

        [Thanks for killing the extraneous post, the /i wasn’t closed right. Given that HeadingOut (our Dr. Saunders’ dad) co-founded a site that has an /excellent/ comment system, someone could arrange for someone to fix something here.]

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        • Ward, I am not familiar with this particular report, but I am familiar with the argument – and I in large agree with it.

          Again, you are (I believe) extrapolating one point and creating a second. It is true that the rising cost of healthcare is in great part due to a system that disconnects the end consumer from the cost.*

          What I am not getting is how you go from that point to either a). believing that I think having few insurers solves our underlying problems (I just explained to you it doesn’t even address them), or b). believing that more insures solves this problem.

          *There is, btw, a second and equally big issue, which is that people do not make rational cost benefit decisions regarding their own healthcare, the way that they do for, say, purchasing a home. I should note that this is most likely connected to the former issue.

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          • Tod you’ve lost me completely. Rereading your post about the 20 VISA companies didn’t help. I happen to know all about VISA, did computer work for them years ago. VISA is not ONE company but a consortium of /thousands/of banks who market bank credit cards under the VISA brand. VISA is really a transaction processing system. In point of fact there is tremendous competition just /within/ the VISA brand and the same goes for Mastercard. In another OP I cant talk about merchant accounts, floor limits, variable rates and so on with credit cards. The health care industry would do well to copy the salient positive features of the credit card industry. In fact you’ve given me an angle on an OP – Now if only I weren’t so busy this month I would have time to write it… :(

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        • The vitriol from some quarters against HSAs has always shocked me. When my wife and I retired, we chose not to go with our employers program and instead buy high deductible HSAs. Love them. Premiums are low and we use the money saved to build our medical savings account. It is the closest thing to rationality in the insurance market today.

          Do all lefties hate HSAs? Or just the evil ones with little pencil mustaches?

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          • It is the closest thing to rationality in the insurance market today.

            I’m super happy they work for you. But apparently lots of other people either rationally disagree with you or they are irrational.

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            • I think it has a lot to do with the structure of the individual HSA. Saying “HSAs work” or “HSAs don’t work” is like saying “Insurance works” or “Insurance doesn’t work”. Some insurance plans are great and work perfectly for the folks who have them. Some are terrible. Some HSAs are great. And some are terrible.

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                • My point was that one person might love their HSA and another might hate their HSA and they might *both* be right.

                  That says little about what role HSAs should play in health care reform. I’m only pointing out that HSAs are not all the same and thus speaking about them in the aggregate is less than ideal.

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                  • Fair enough. Unless I was speaking of them in the aggregate. At the meta/policy/solution to our problems level.

                    Which I was.

                    (I anticipate you using Bonetti’s defense against me. It’s obvious because of the rocky terrain. But I have to tell you something…)

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                    • I don’t know who Bonetti was or what his defense was, so I apologize for missing that reference.

                      If you want to speak about HSAs in the aggregate, by all means, do so. But that is like speaking about fruit in the aggregate and insisting it is all terrible and should be banned because people hate prunes. Well, there also exist mangos. And mangos are fantastic! It CAN be done, but requires a mindfulness of the nuance and variety present within the aggregate.

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                    • Seems like my HSA rationality comment started a ruckus, and I missed out.

                      When I say it is rational, I meant that it was rational for me, and that it was rational in that it better aligns the costs with the benefits of insurance. Murali asked us what is wrong with insurance, and that was at the top of my list. When you separate consumption of a product with paying, you will fish up the market. HSAs start to refer this. does anybody dispute this?

                      When I said lefties seem to hate them, I didnt mean they just hate them for themselves, they hate other people having them too. They seem to want to get rid of them. When non lefties say that sometimes it seems the left wants to turn everything over to big government, and eliminate our freedom of choice, this is an example of why we suspect this.

                      I never suggested everyone will want them. This just gets back to why we need LOTS MORE competition.

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                • And some people don’t like the idea of eliminating government’s role in health care provision in favor of subsidies coupled with “market oriented policy instruments

                  The thing is, subsidies coupled with market oriented policy instruments still require some government role (who is going to provide the subsidy, and who is going to implement the new policy instrument and get rid of the old one?) Of course, the role of government here may be less, or maybe just different. But even if it is reduction and not elimination, I want to know if their grounds for dislike is reasonable.

                  An example of an unreasonable dislike would be people not liking regulations that prevent them from overfishing and thus causing tragedy of the commons.

                  i.e. Do people’s dislike of HSAs come about because they have to watch what healthcare they consume and not overconsume like they used to under their insurance plan? Or is it just a case of the welfare transfers being insufficient to support them when they need it.

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                  • Mr. Murali—You do realize you live in a fascist city-state, yes?

                    And I mean “fascist” in the nicest possible way. Mr. MacLeod knows what I’m talkin’ ’bout. Mussolini gave fascism a bad name, allying with Hitler and invading Ethiopia and all.

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                    • Wasn’t fascism usually associated with some kind of paramilitary movement? Honestly, I don’t know that the term can be applied sensibly outside the context of the 1930s when such movements proliferated and mostly promptly vanished. Singapore practices some kind of post-modern authoritarianism but I don’t know if there’s a term for it yet. If the Chinese keep copying them, in 40 years we’ll probably all be pretending its communism

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                    • And I mean “fascist” in the nicest possible way. Mr. MacLeod knows what I’m talkin’ ’bout

                      Fascist is almost universally seen as derogatory, so its difficult to see what the nicest possible way in which Singapore is fascist, but Switzerland and the US are not.

                      If you mean fascist in the sense of corporatist, then sure, singapore is fascist, but so is the US and about every other market economy currently in existence. If you mean that Singapore is undemocratic, not really. The unusual makeup of our legislature is partly a product of their relative popularity (66% of popular vote), Singapore’s small size, and first-past-the-post system of representation. One of the things that pisses me off about democracy is the way that democracy is what stands between gays in Singapore and their rights. Sodomy is stilll illegal for God’s sakes (even if the law against it is unenforceable because of privacy issues)

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                    • Murali, at its basic, fascism is built on the notion that a bundle of sticks is stronger than the same number of sticks, unbundled. It shouldn’t be used except as a derogatory comment, in my view, because of all of the negative associations. However, someone using it and saying that they don’t mean it in a bad way is presumably talking about a state with extraordinarily strong social and legal ties bound together very closely (like a bundle of sticks).

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                    • fascism is built on the notion that a bundle of sticks is stronger than the same number of sticks, unbundled.

                      So, your saying that fascism is the idea that faggots will overpower an undisciplined citizenry? Sounds about right.

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            • HSAs may work well in reducing health care usage, but I can completely understand why most working people might prefer a traditional health care plan: they can get healthcare without having money deducted from their paycheck, or worrying about the affordability of having to go to the doctor.

              I haven’t seen any research that trys to address long-term health care costs for HSA vs non-HSA health plans (after taking into account the population differences between those who opt for them and those who don’t). It may be the kernel of a bigger solution for growing costs–I just don’t know.

              But I suspect that they are a more attractive option for those that already have a buffer of disposable income, and for the white-collar types.

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                • Don’t most HSAs have a maximum annual payout? Mine did. I think I was on the hook for the first $3500 and everything* after that was covered.

                  * I never got to that point, so I don’t know how broadly or narrowly the insurance company defined “everything”.

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                  • I should clarify that… the “maximum annual payout” is the maximum amount the insured could be responsible for. I suppose that is called a “deductible”. There is no “maximum annual payout” in terms of what the insurance company will pay out. At least, that is how mine worked.

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                  • Typically you have an HSA plus high deductible coverage. Generally, schemes are set up so you pay enough into the HSA over the year to cover the deductible. Beyond that, its like regular insurance.

                    We actually had a plan like this, although with an FSA instead of an HSA which has problems, so I’d recommend a HSA. We had an unexpected ER visit, resulting mainly in a change of pediatrictians, a large bill and no actual medical problem, and did use up our deductible. It worked more or less as expected, except I learned that hospitals don’t understand their own bills so if you do something weird like asking questions about them, they tend to get confused and just give you an extra discount. Afterwards I did the math and determined if you do expect to use up the deductible, an HSA plus high deductible plan is marginally worse than a regular PPO, but not by much.

                    Anyway, yes, your understanding is correct and Jesse’s is not.

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                    • It’s worth noting that if you tell a provider that you’re paying up-front, and that they won’t have to file an insurance claim, you can often get some great discounts.

                      Anyway, yeah, HSA’s are typically combined with a high-deductible plan, so it’s not usually a case where you’re gonna plum run out of money.

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                    • That’s very true, but the priced quoted on medical bills for many treatments is completely ridiculous compared with the in-network prices insurers actually pay. In one recent case – this one resulting in actual medical care rather than the firing of a doctor – I believe our in-network discount was 93% of the quoted price. I suspect the discount you get for paying out of pocket could be similar – I know my PCP says they give you 40% for paying out of pocket. But then the question is, why the absurd quoted prices to begin with if everyone gets a discount somehow? Are they mainly just trying to inflate what they get from medicaid/care?

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                    • Let’s say that there is a 40% discount that the insurance companies get through a negotiated rate. Now, let’s say that there is also a 40% discount you get for paying cash. Who pays the 100%? The guy whose claim gets denied, whose check bounces, or whatnot. I’ve been that guy, which is why I became the guy who said “You know what, I’ll pay cash!”

                      That 93% markdown you’ve seen is actually quite shocking. I’ve never seen anything like that.

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                    • My employer offered a really great deal. They determined the cost of single HMO coverage. They then offered this amount ($5400 at the time) to each employee to put towards their insurance. You could opt for the single HMO coverage, meaning the employee got “free” basic health care, opt for a more expensive plan (such as single PPO or family HMO) and pay the difference between the allowance and the cost, or opt for the cheaper HSA (about $3200 in premiums a year). If you opted for the HSA, you could take the difference as additional pay (taxed) or use it to fund your HSA (non-taxed). I believe the individual deductible was $3500, meaning that my employer covered all of my premiums and about 2/3 of the deductible directly into the HSA. Money left in the HSA was rolled over, so if you rarely visited the doctor (as I did), you’d have the full annual deductible in your HSA after two years and then just took the rest of the difference in additional salary, backfilling the HSA as necessary. Win-win-win.

                      The only reason I left the plan is because after I married, I had a fourth option to take the entire $5400 as salary (taxed) so long as I was covered by my wife’s plan. My wife’s employer offered a phenomenal plan for a paltry sum, so we opted for that.

                      This is now the second such job that had a setup along these lines, wherein they gave you $X amount to put towards benefits and/or salary. Perhaps there are flaws in this system I haven’t thought of, but it seems preferable to most other employer-based systems.

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                    • Kazzy – My wife had a similar arrangement, although I don’t think it was as well thought out as yours, where they had a lump sum they could cash out or put towards whatever benefits they liked. For this reason, we’ve used my insurance since we got married.

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                    • Anyway, yeah, HSA’s are typically combined with a high-deductible plan, so it’s not usually a case where you’re gonna plum run out of money.

                      Always combined with high-deductible plan. If your plan’s deductible isn’t at least $1200, you don’t qualify for an HSA.

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          • I’m guessing the lefties against HSA’s couldn’t be bothered to click on the link I provided. Therefore I’ll quote from it here:
            The Blue Cross Blue Shield Association, whose members dominate the HSA market, says that enrollees are more likely than those with traditional insurance to be better consumers. They’re more likely to track expenses (63% to 43%), save for the future (47% to 18%), and search for information on physician quality (20% to 14%). They’re also more likely to participate and see results from wellness programs like weight loss, fitness and smoking cessation. This makes intuitive sense: They’ve got skin directly in the game.

            David Goldhill, a media executive, recently wrote in the Atlantic Monthly that if a 22-year-old starts at his company today earning $30,000 and health costs grow at 3%, by the time he retires he’ll have paid out $1.77 million in premiums, lower wages, out-of-pocket costs and both sides of the Medicare payroll tax.

            If all that money were instead available via an HSA, including by borrowing against future contributions, “wouldn’t you be able to afford your own care?” Mr. Goldhill asks. “And wouldn’t you consume health care differently if you and your family didn’t have to spend that money only on care?”

            This is precisely the future liberals fear because it would make health care less susceptible to political control. The Reid bill makes it impossible for people to choose better reform alternatives, the ones that can only be discovered through innovation and competition in a dynamic marketplace.

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            • WS-

              To the points in the first paragraph, isn’t there a bit of a chicken-and-egg situation there? The HSA might make the folks who have them a better consumer. But it also might be that more savvy consumers tend to seek them out. Now, in either scenario, that is still a pretty good sign of their value, but knowing which way causality runs is important. A doofus with no financial sense might be better off with another plan if the latter is the reality.

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              • Kazzy, do you own an HSA plan? Are you at least marginally familiar with them? I’ve owned HSA plans quite literally from the day they became available, indeed for someone like me who likes to drive his own bus it is the only thing that makes sense. Are there stupid people in the world? Obviously. Are we obligated to diminish our own world because there are stupid people? I play chess at the 2000 level, stupid people can’t even play the game period. Should chess not then be abolished? Stupid people is a stupid argument.

                This OP is about Health Insurance and Competition. Tod doesn’t think competition works in health insurance but the cold harsh fact is, competition /barely/ exists in the health industry as a whole, let alone health insurance. HSA’s were a GREAT first step towards creating the kind of competitive environment wherein the health industry could be improved by the rigors of competition. Unfortunately the politicians (*read Democrats) fought it tooth and nail from the get go and continue to do so today. 13.5 million consumers have opted for choice Naturally once the Dems had the filibuster proof majority they needed in the Senate, they made damned sure to cripple then destroy HSA’s: “In the latest report, over 13 million people now have chosen to go with an HSA. This shows the growing popularity of this type of plan, as more and more people see that it makes economic sense,” said Turner. “The real threat is that Obamacare’s rules and regulations will make it increasingly difficult for companies to offer and for individuals to buy this kind of health insurance.”

                Health and Human Services are doing their part in the HSA destruction.

                To summarize, Tod says competition doesn’t work in health care, I say it /could/ if allowed to exist the Democrats say it shall NOT be allowed to exist therefore Tod wins (as long as Democrats are in charge). Can’t wait for the next election. :)

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                • I say it /could/ if allowed to exist

                  What is the ‘could’ here? In a perfect world? A world very similar to ours but lacking liberal corruptions? A politically possible world?

                  the Democrats say it shall NOT be allowed to exist

                  Actually, that gets things backwards. The Democrats are responding to a failure of markets to fill all the various insurance gaps that currently exist. Is it a perfect plan? Hellnaw. But it’s a damn sight better than allowing the market to fill the gaps, since the market created those gaps and the market can’t fill the gaps for people with PECs, one of which is the natural process of aging.

                  therefore Tod wins

                  Tod is making a very narrow argument here, limited to the belief that increased competition will drive down health care costs. He doesn’t win anything here. He’s just attempting to correct what he thinks is a conventionally accepted false belief.

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                  • SW,

                    I have come to grips with Tod’s OP as saying that arbitrarily perverting the market to artificially add more insurers is a bad idea. This does not lead in any way shape or form to the onclusion that increased competition is bad.

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                    • Seems to me Tod’s thesis was that increasing the number of health insurance providers 1) won’t reduce the cost of a premium (in fact, it will increase premium price), and 2) won’t decrease the price of health care services (bend the cost curve).

                      Seems to me what you’re suggesting is that competition in the form of different types of provision-vehicles will reduce premium price because it’ll act to decrease the price of services.

                      I think those are two different things which both may be true. Tod’s argument is premised on the idea that everything else stays the same, yours isn’t. Also, Tod has made it pretty clear that he thinks the mechanisms we currently employ, and which the PPACA entrenches, don’t effectively bend the cost curve, which is one of the central focuses of your suggestion.

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                • Ward-

                  Please don’t make more of my comment than it was.

                  I did own an HSA and despite it being comparatively worse to other HSA plans friends had, it still worked well for me. I am not opposed to HSAs and, generally speaking, am quite in favor of them.

                  “The Blue Cross Blue Shield Association, whose members dominate the HSA market, says that enrollees are more likely than those with traditional insurance to be better consumers. They’re more likely to track expenses (63% to 43%), save for the future (47% to 18%), and search for information on physician quality (20% to 14%). They’re also more likely to participate and see results from wellness programs like weight loss, fitness and smoking cessation. This makes intuitive sense: They’ve got skin directly in the game.”

                  All I’m saying is that we can’t necessarily conclude that very last sentence there. It is possible that being involved in an HSA, having skin in the game, means they are better consumers. However, it is also possible that they were better consumers to begin with, and sought out an HSA precisely because it made sense for a consumer like them.

                  With this in mind, we absolutely should make available HSAs. However, we should not assume that an HSA or otherwise “having skin in the game” will necessarily lead to better consumer behavior. We just don’t know the direction of causality. At least not based on the info offered.

                  My only quibble was with the numbers cited in that first paragraph… no more, no less.

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                  • Kazzy,

                    The logic that HSAs tap into is the well established proof that people are more efficient with consumption when they actually have to pay for it. Granted any theory should always be tested to ensure there are no spurious correlations. But I think you agree that the case for HSA to start to reduce runaway health costs is solid.

                    When I have to pay for the service, guess what? I shop for the generic Walmart prescription and ask for the cash price. And I get it. When I needed surgery, I got the provider in network discount. HSAs are a wonderful part of insurance for some of us. I would never require it for those that like paying more for full coverage.

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                • Also, for ancedote hour, I know people who had decent insurance plans and were their plan changed to the “choice” of an HSA by their employer and they hate it, since now along with their 401k, IRA, and other plans, now they have to spend time on their HSA plan instead of their insurance plan which ya’ know, they paid a co-pay and that was the extent of it. Their health care spending hasn’t changed at all, it’s just made their life more complicated.

                  Some people don’t want 212 choices. They want one thing that works well when they need to use it.

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                • The HHS regulations will get fixed, as soon as the non-obsessed get around to noticing. Noone has any interested in killing of HSAs, insurers and Democrats least of all. I’ve been told 100 times over the last 10 years that Democrats are making HSAs illegal real soon now, and yet somehow the things keep proliferating.

                  More interestingly, my experience of a high deductible skin-in-the-game plan was that being an informed consumer is almost impossible. Care providers don’t generally know their own prices, or understand their own bills, so shopping around is a non-starter.

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                  • The opacity of prices in the US is puzzling (as is the difference in price if you pay via insurance vs out of pocket)

                    Even in India (which is still a third world basketcase), whose medical industry is virtually unregulated, everyone shops around. Hell, doctors basically advertise and hospitals attract consumers by branding.

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                    • There’s something completely screwed about the prices in US healthcare. I’m not kidding when I say that a doctor in the British NHS can tell you his prices with more accuracy than an American doctor, in spite of the fact you’ll personally never have to pay the former but supposedly have some kind of interest in the latter.

                      I don’t understand why this is, exactly, but I’m beginning to suspect its something to do with medicare. And the American ethos of never giving a sucker an even break, of course.

                      In spite of being generally sympathic with market based solutions in general, I get annoyed when people suggest that market based solutions to the US healthcare problem can be driven only from the consumer side by HSAs or whatever. Clearly there are terrible supply side problems that need to be understood first.

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                    • “Clearly there are terrible supply side problems that need to be understood first.”

                      Clinics.

                      Government, charities. Public-private partnerships between the two.

                      Keep the cash flowing around just enough that the public facilities and charities function. Think of it as public transportation as opposed to giving every citizen a Cadillac.

                      Is there a human right to public transportation? In a weak moment, you might even persuade me of that. The LA Bus Riders Union. [Sorry for the “scare quotes, ” but unions work for a living. But I am indeed sympathetic to the working poor needing a way to get to their shitty jobs.]

                      But Obamacare is

                      http://reason.com/archives/2012/07/02/5-reasons-the-california-high-speed-rail

                      and it’s ideology, no more or less.

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                    • Simon, I think the assumption is that if you give the consumer purchasing power, the supply side will have to start having more coherent pricing because it will start to matter. Right now they don’t because it doesn’t.

                      Go to the dentist, and they are more likely to be able to give you a square price because so many pay in cash. Ditto for eye surgery. So I think there’s something to it.

                      It might not be enough, though, and more transparent pricing (like France requires) might need to be a part of the equation.

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                    • Will, yes I think that’s the assumption, but I know some companies that experimented with HSAs for their employees had to start aggregating and publishing price data themselves so employees would have somewhere to look. This is the first stage in solving the problem, of course, but its quite strange its being done outside of the medical and insurance world, isn’t it?

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                    • This is the first stage in solving the problem, of course, but its quite strange its being done outside of the medical and insurance world, isn’t it?

                      Yeah, but I think that’s mostly because the market for it is so tiny. Providers and insurance companies can afford to be opaque because so much of the market is someone else pays. I don’t oppose regulation to make pricing more transparent, though (with or without a shift towards consumer-driven health care, actually).

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  16. Just hosted a party tonight (including BTW a dermatologist who does botox treatments on famous actors in LA). As you know botox is NOT covered by insurance, nor are fake boobs, butt cheeks and so on that those actors strut around the screen in. Given that it is a competitive medical procedure by its very nature there is a two-faceted mechanism involved. First actors (yes even George Clooney) care about cost, but moreso they care about quality. Pricing is essentially posted although there are obviously differences for different procedures and complexity. Reputation /really/ matters.

    Now compare to some other friends who are respectively a cardiologist and emergency room physician. The cardiologist does the vast majority of his business via Medicare. Medicare is very ‘fascist’ about pricing, the government essentially says, “We get the best price, period – and if by some mistake we don’t, do not pass go, do not collect $200 go Directly to Jail!_” Therefore when you ask a cardiologist what something costs they quite literally don’t DARE answer, because you might be gunning for a whistleblower reward. My buddy’s mother-in-law was visiting from China and was having a real problem. I called a marker with my cardiologist friend and got her in to see him. Two days later she had a brand new pacemaker, she would not have lived through the week without it, nor survived the flight home. My buddy wanted to pay cash for his mother-in-law but that created a real problem. They had to carefully analyze Medicare billing codes previously used and make sure that he was charged substantially more than Medicare would have been for the same work, all to avoid the long lash of the Medicare whip.

    Emergency rooms are another beast entirely. Often seeing uninsured, they are legally obligated to serve everyone so the hospital runs the ER as a loss-leader hoping against hope that referrals to elective procedures via the ER conduit will lessen the bleeding caused by running a much abused system. His “clientele’ consists of about 1/3 junkies pretending they have a problem so they can score drugs, 1/4 accident victims 1/4 sick people with maladies ranging from (literally) sniffles to TB or worse and another 15% miscellaneous old folks who are (also literally) on their last legs, possibly getting an ambulance ride to their last stop before their /real/ final destination. The hospitals can count on money from the old folks via medicare/medicaid and /some/ of the accident victims. The rest are typically no pays who will happily give fraudulent information so they’ll never see a bill.

    The McKinsey report is pretty clear. The US pays FAR more than every other country in the world for health care. That doesn’t automagically translate into superior health care outcomes. Our system is a mess, I don’t for a nanosecond believe ACA is going to make things better, in fact I’m confident it will make things worse as are 100% of the physicians I personally know. Most who are in a position to retire fully intend to do so within the first year or so of its full activation even though they have plenty of potential years remaining. That will of course exacerbate an already existing shortage of doctors as 30 million new takers jump into the system.

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  17. As a person who worked on the TPA side of things, let me compliment you on the nice post.

    Just to add a few miscellaneous things:
    1. Since the introduction of HSAs, hospital and clinic slow pays and default rates on insured patients has increased dramatically.
    2. HSAs may work if properly funded, but the norm is not to do so. Since they have been introduced, employers have tended to keep the savings.
    3. Discretion requires a certain level of disposable income. You have people presently avoiding checkups due to a $50 copay. The idea that they are going to shop around for something they can’t afford and likely premised on cash in advance or at time of service is highly improbable.
    4. To rephrase the author, health insurance is sold for liabilities settled within the plan year. There is no future to bank against. Extra money spent today cannot be recouped tomorrow. The business benefits from the unpredictability of cash flows being captured by the insurance company. Self insurance is the acceptance of some of that cash flow risk.
    5. If we are to define affordable health care as consuming no more than 15% of a person’s income, there will be a significant excluded population. At a modest $500 month for an individual plan and $2400 out of pocket, a person needs to make about $50,000 per year for health insurance to be affordable.

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