Hits & Misses – 2009/01/08
Is Obama anti-science? Everyone assumes he will be better than Bush. But his chief science advisor advised Paul Ehrlich in the famous bet he lost to Julian Simon. Hat tip to Tyler Cowen.
Rhode Island gets a Medicaid block grant. It's the nation's first, but the legislature has to approve.
Will spending on health care stimulate the economy? Not if the past is a guide, according to Cato scholar Michael Cannon.
Hospitals compete on amenities rather than quality of care. This is from RAND: a one-standard-deviation increase in amenities raises a hospital's demand by 38.4% on average, whereas demand is substantially less responsive to clinical quality as measured by pneumonia mortality.
The ultimate in price competition: free! Giant Food stores is giving selected generic antibiotics away for free to patients with a prescription!
Are health insurance markets competitive? No. An NBER study finds that the more profitable the employer, the higher the premium. Another hat tip to Tyler Cowen.
Hard to believe that Rhode island is the only state that asked for a block grant. I assume this means they will have the freedom to decide for themselves how to spend the money
I suspect that it is cheaper for hospitals to compete on amenities rather than on quality of care.
NBER result is why we need a national market for health insurance in which people can buy across state lines.
I like the juxtaposition of the RAND study and the Giant Food store announcement. In one case, the providers don’t compete on price, so they don’t compete on quality either. In the other case, the provider does compete on price and the price ends up being zero.
There must be a lesson in here somewhere.
If NBER studied large employers and the premiums paid, they cannot attribute premiums paid to health insurers necessarily. Further, it appears their goal is use the data to paint insurers as greedy and unreasonable in order to further the conversation towards national health care.
Most large employers, over 1,000 employees, are self-insured or reinsured through insurers that they own or lease – captive insurers.
Alas, insurers have very little at stake in pricing a self-insured or captive arrangement. Therefore, insurers have little at stake in being competitive – as their exist no competition within the employer plan by the employers own design.
The pricing is determined by the empoloyer’s aggregate actual claims cost from their very own employees during previous years – experience.
Pricing is largely driven by the claims actually incurred by the group in past years.
Reserves are calculated as a percentage of the paid claims and then layered on top of paid claims – Incurred But Not Reported, IBNR.
Taxes paid to the state usually account for 2.5 percent of premium.
Expenses for administration including billing, collecting, issuing certificates of coverage, other customer service, payment of claims, and management overhead generally accounts for about ten to twelve percent of premium. This is the only segment of the overall cost of insurance where insurers compete – 10 to 12 percent of the total! Hardly a significant overall factor in pricing!
Oh, yes, all business exists to make a profit. That’s about five percent of the total. But not necessarily part of an administrative services only plan.
With large employer plans, as a self-insured or captive reinsured plan, the only money that goes to the insurance company is the administrative expenses.
Taxes go to the state treasuries. Profit is squeezed out of the administrative total, so there is no extra profit on risk. IBNR is a relative component whether or not the risk is held by the employer or the insurer. Paid claims are paid to the providers – hospitals, docs, pharmacies et al.
Ultimately, pricing of the insurance policies is driven by paid claims. As the amount of paid claims drops, the cost of insurance drops.
The more profitable the employer, maybe the higher the expectation is for a more lavish insurance plan, which in turn drives up pricing. That is the option of the employer and not a function of the insurance company.
The NBER study really says nothing about pricing of insurance.
As an analogy, the more profitable companies may also keep Cadillacs as their company car of choice. Does that mean the price of cars is higher than those less profitable companies that choose to maintain Chevrolet as their company car? Obviously, the two types of companies have different cars. Just like more profitable employers have richer insurance plans.
The insurance pricing is driven by the richer choice of plan and the level of claims paid and therefore claims incurred but not reported. These pricing components are driven by the employer not the insurance company.
What makes the pricing competitive? Employer choices, not insurance company greed. NBER’s argument is disingenuous.
Nice try by the NBER to take a swipe at insurance companies as unruly ogres trying to take as much money from the health care system as possible.
You sold Larry C on your argument and likely many others.
Too bad.
Pricing can be best affected by lowering paid claims. How is this done?
First and foremost – eliminate assignment of claims payment from insurer to provider and by-passing the insured. When individuals have to write a check to the doctor or hospital, they will question why they are paying so much and what they are paying for – just like buying a house, car or anything else.
Second, create transparency of pricing by doctors and hospitals. Just like Dorothy, the Tin Man, Cowardly Lion and Scarecrow removed the curtain shrouding the Great And Powerful Oz, we need to see what doctors and hospitals charge for each and every coded procedure. Competition will naturally ensue. Competition will drive down prices charged for procedures, aka paid claims.
Third, and a with a good start provided by HSAs, individuals need to pay for medical care that is routine and annual. We need to return to the days before LBJ’s Great Society which handcuffed us with major medical insurance that paid for anything at any price. We need to pay for routine care from our own pocket, through HSAs, that will make the majority of medical costs tangible and those who provide care accountable.
Insurance pricing can and should be addressed. The source of the problem, however, should be recognized as reducing the cost of claims, and therefore the pricing charged by providers.