Regarding the impact of “competition” on premiums, I read the academic article linked in the source. Despite the appearance of a partial differential equation and the impressive use of standard academic Latin (ceteris paribus; de novo) I’m not persuaded.
Why not?
Because of the focus on price to the exclusion of cost.
What drives price anyway? Isn’t Price driven by cost? And isn’t the cost determined by the actual utilization, not some mathematical projection? Does any sane vendor set its price below its expected cost? Doesn’t that mean there’s a price floor dictated by expected cost? All insurers have competent actuaries; isn’t it possible some of them decided not to play in markets where they believed they could not be competitive? Doesn’t the expected enrollment demographic influence the expected cost? Isn’t it at least possible that some insurers made a conscious decision to stay out of high-cost markets in the first place? Isn’t it true that Aetna participates in more HIMs than any other insurer? Isn’t it also true that insurers like Aetna and United (plus some of the large consulting firms) are offering coverage thru private exchanges? I have more Qs but this is enough to get where my doubts arise.
Maybe the authors’ findings are correct. Maybe all it takes to reduce premiums is another competitor or two. But that strikes me as improbable and, anyway, is not possible to tell based on their paper. I’m very disappointed in it.
John thanks for responding. I’m just trying to say that I think it’s not necessarily true that adding another competitor will always reduce prices.
Any supplier that intends to stay in business must achieve revenues that exceed its costs. Disregarding subsidies & cross-subsidies, doesn’t that mean there’s a price floor dictated by the supplier’s expected cost?
Medical insurers’ main cost by far is the medical care they pay for. If their premiums already reflects the insurance market floor price, then how can adding another competitor reduce prices?
And even if the premiums are not yet at that floor level, unless insurers find ways to reduce the cost of medical care, the impact of a new competitor on premiums seems limited to some potential for the insurers to reduce their internal costs – – which is clearly very small in comparison to the total premiums.
I am not in a position to support the article fully.
However, I would propose that insurers in exchanges are not offering commodities. The benefits are regulated but the access (networks) is not (although both state and federal regulators assert that they do ensure network adequacy).
Underwriting is also important in Obamacare exchanges, because of guaranteed issue and community rating. Attracting healthy subscribers and repelling sick ones is a critical success factor.
So, insurers will compete along these lines. They will not just process claims.
I agree – and I’m not talking about just processing claims either. But still, there are just two basic components of the premium – medical cost and insurer operation cost.
The former is by far the larger but is the component insurers have the least power to influence, even with underwriting, even with networks. Ironically, it appears that to achieve more competitive medical cost, insurers should merge to maximize their bargaining power; but that means fewer competitors not more. And even with fewer insurers bargaining harder, the service providers’ ability to discount their charges is limited by their own cost structures. So I think insurers’ medical costs in each market are likely to converge and will become less and less responsive to the addition of more insurers in the market. (Unless of course medical delivery is reformed in a way that reduces cost. The hIstory suggests adding more medical service providers doesn’t reduce medical costs.)
That leave the insurers to compete based on premiums that reflect similar medical cost (85% of the premium) plus whatever differential they can squeeze out of their operations cost (15% of the premium).
This all suggests to me that competition will result in price differences that are relatively unaffected by adding more insurers to any market.
Every time I go around this barn, I come back to the same place. Am I missing something really important?
Time will tell. It looks like there will be new entrants in to some exchanges in 2015. Plus there is this interesting insurer named Oscar which stood up solely to enter the New York exchange.
Whatever its business plan is, it worked, because it has raised $80 million in capital to enter other exchanges in future years.
I’m surprised that more insurers didn’t wait to sell in the exchange until after the first year. The individuals mostly likely to enroll the first year are those who are older, with lower health status. These are less likely to be profitable customers. Grabbing market share at the expense of profitable enrollees is not a viable strategy. That’s like the old adage about the businessman who was losing money on every sale but was hoping to make up for it on volume.
“Many ObamaCare exchange beneficiaries to pay twice as much for prescription meds as those with job-based plans.”
Of course things become more problematic for ObamaCare beneficiaries. ObamaCare plans are far inferior to employer based coverage, as it is more costly all around for ObamaCare beneficiaries.
Higher out of pocket costs gives less incentives for individuals to pay for their meds, which cause chronic conditions to worsen and more medical visits. It is a vicious cycle.
“Consumers who purchased new health plans from Blue Shield of California have sued the insurer, claiming they were misled into thinking the insurance would cover their desired doctors and hospitals.”
That’s what happens when you have people who take the president at his word that, “if you like your doctor, you can keep them.”
Why is it that something people want and use, especially seniors, are the thing that gets cut like Medicare Advantage plans. They cut the things that work and spend on broken policies.
“The reason for the higher prices in some markets? Paltry competition”
More competition equals lower prices. That is Econ 101. It makes complete sense that the more insurance companies that offer coverage, the lower coverage will cost.
For cheaper plans, these places need more insurers. Instead, individuals are only given the option of high premiums and narrow networks. At least with more insurers there would be cheaper premiums.
Here I thought they were saying ObamaCare encouraged competition, but its competition between 2 companies. ObamaCare becomes oligopolies all over the country.
The Humana article also indicates they anticipate premium increases in 2015. That is extremely alarming, considering how expensive they already are.
Regarding the impact of “competition” on premiums, I read the academic article linked in the source. Despite the appearance of a partial differential equation and the impressive use of standard academic Latin (ceteris paribus; de novo) I’m not persuaded.
Why not?
Because of the focus on price to the exclusion of cost.
What drives price anyway? Isn’t Price driven by cost? And isn’t the cost determined by the actual utilization, not some mathematical projection? Does any sane vendor set its price below its expected cost? Doesn’t that mean there’s a price floor dictated by expected cost? All insurers have competent actuaries; isn’t it possible some of them decided not to play in markets where they believed they could not be competitive? Doesn’t the expected enrollment demographic influence the expected cost? Isn’t it at least possible that some insurers made a conscious decision to stay out of high-cost markets in the first place? Isn’t it true that Aetna participates in more HIMs than any other insurer? Isn’t it also true that insurers like Aetna and United (plus some of the large consulting firms) are offering coverage thru private exchanges? I have more Qs but this is enough to get where my doubts arise.
Maybe the authors’ findings are correct. Maybe all it takes to reduce premiums is another competitor or two. But that strikes me as improbable and, anyway, is not possible to tell based on their paper. I’m very disappointed in it.
Thank you for your comment, which I don’t quite follow. In a market, price is determined where the marginal customer meets the marginal supplier.
The suppliers have supply functions which represent costs, so cost is a factor of price, but I do not think that is what you mean.
John thanks for responding. I’m just trying to say that I think it’s not necessarily true that adding another competitor will always reduce prices.
Any supplier that intends to stay in business must achieve revenues that exceed its costs. Disregarding subsidies & cross-subsidies, doesn’t that mean there’s a price floor dictated by the supplier’s expected cost?
Medical insurers’ main cost by far is the medical care they pay for. If their premiums already reflects the insurance market floor price, then how can adding another competitor reduce prices?
And even if the premiums are not yet at that floor level, unless insurers find ways to reduce the cost of medical care, the impact of a new competitor on premiums seems limited to some potential for the insurers to reduce their internal costs – – which is clearly very small in comparison to the total premiums.
Yes? No?
I am not in a position to support the article fully.
However, I would propose that insurers in exchanges are not offering commodities. The benefits are regulated but the access (networks) is not (although both state and federal regulators assert that they do ensure network adequacy).
Underwriting is also important in Obamacare exchanges, because of guaranteed issue and community rating. Attracting healthy subscribers and repelling sick ones is a critical success factor.
So, insurers will compete along these lines. They will not just process claims.
I agree – and I’m not talking about just processing claims either. But still, there are just two basic components of the premium – medical cost and insurer operation cost.
The former is by far the larger but is the component insurers have the least power to influence, even with underwriting, even with networks. Ironically, it appears that to achieve more competitive medical cost, insurers should merge to maximize their bargaining power; but that means fewer competitors not more. And even with fewer insurers bargaining harder, the service providers’ ability to discount their charges is limited by their own cost structures. So I think insurers’ medical costs in each market are likely to converge and will become less and less responsive to the addition of more insurers in the market. (Unless of course medical delivery is reformed in a way that reduces cost. The hIstory suggests adding more medical service providers doesn’t reduce medical costs.)
That leave the insurers to compete based on premiums that reflect similar medical cost (85% of the premium) plus whatever differential they can squeeze out of their operations cost (15% of the premium).
This all suggests to me that competition will result in price differences that are relatively unaffected by adding more insurers to any market.
Every time I go around this barn, I come back to the same place. Am I missing something really important?
Time will tell. It looks like there will be new entrants in to some exchanges in 2015. Plus there is this interesting insurer named Oscar which stood up solely to enter the New York exchange.
Whatever its business plan is, it worked, because it has raised $80 million in capital to enter other exchanges in future years.
I’m surprised that more insurers didn’t wait to sell in the exchange until after the first year. The individuals mostly likely to enroll the first year are those who are older, with lower health status. These are less likely to be profitable customers. Grabbing market share at the expense of profitable enrollees is not a viable strategy. That’s like the old adage about the businessman who was losing money on every sale but was hoping to make up for it on volume.
“Many ObamaCare exchange beneficiaries to pay twice as much for prescription meds as those with job-based plans.”
Of course things become more problematic for ObamaCare beneficiaries. ObamaCare plans are far inferior to employer based coverage, as it is more costly all around for ObamaCare beneficiaries.
Higher out of pocket costs gives less incentives for individuals to pay for their meds, which cause chronic conditions to worsen and more medical visits. It is a vicious cycle.
“Consumers who purchased new health plans from Blue Shield of California have sued the insurer, claiming they were misled into thinking the insurance would cover their desired doctors and hospitals.”
That’s what happens when you have people who take the president at his word that, “if you like your doctor, you can keep them.”
Also, Blue Shield of California just happens to fail to mention that many of their plans are not nearly as open as they state. How convenient of them.
It will be very interesting to see how this litigation develops. If successful, it could really hurt all insurers operating in Obamacare’s exchanges.
Why is it that something people want and use, especially seniors, are the thing that gets cut like Medicare Advantage plans. They cut the things that work and spend on broken policies.
“The reason for the higher prices in some markets? Paltry competition”
More competition equals lower prices. That is Econ 101. It makes complete sense that the more insurance companies that offer coverage, the lower coverage will cost.
For cheaper plans, these places need more insurers. Instead, individuals are only given the option of high premiums and narrow networks. At least with more insurers there would be cheaper premiums.
Here I thought they were saying ObamaCare encouraged competition, but its competition between 2 companies. ObamaCare becomes oligopolies all over the country.
“It makes complete sense that the more insurance companies that offer coverage, the lower coverage will cost.”
If only competition really worked that way.
If it did, then given enough competitors the cost could be zero.
If only.