Yet Another Reason Why Obamacare Health Insurance Prices Make so Little Sense
Proponents of government run health care have an inexplicable disdain for geographic variability. They often seem to assume that physicians, treatments, and outcomes should be constant across the entire United States. Any variations in price, treatment modality, or expenditure ranks as a sure sign of an improperly run health care system.
The problem is that normal human activities vary even over relatively compact geographic areas, and the variations often reflect the exigencies of daily life rather than administrative boundaries. For example, when a company took the trouble to analyze credit and loyalty card data about its customer’s shopping habits, it found that even a relatively compact area like a city had distinct variations in its shopping and retail use patterns.
The maps below are reproduced from a Boston Consulting Group article about what the company learned about its pricing power. In the beginning, the company had the single pricing zone for all of Georgia shown in the left hand map panel. The right hand map panel shows how its pricing zones changed after customer habits were considered. Of interest is the fact that Atlanta ended up with multiple pricing zones. High population density makes it harder to move around, limits customer mobility, and people’s ability to access goods and services. The report notes that in Atlanta, stores serving the same clusters of customers often are “located along commuting corridors.”
Understanding the variation in purchasing patterns “gave the retailer a strong rationale to establish as much as a 30 percent price difference for the set of products across store clusters.” In some clusters, it raised prices while “still offering the lowest available price in the area.” In other clusters it lowered prices “just enough to beat the local competition.”
Price variations are important because they convey information about whether sellers are appropriately deploying resources to serve their customers. If higher prices in an area lead to larger profits, they signal that customers in that area might be willing to pay to have more resources devoted to satisfying them, especially if their ability to access resources elsewhere is limited. Lower prices may signal that an area needs fewer resources.
For the better part of a century, the major problem with the regulation of U.S. health care is that those who populate government have done everything that they can think of to eliminate accurate prices and the information that they convey with the result that resource misallocation is a huge problem.
The Obamacare rules for insurance pricing are continuing in this tradition. In contrast to the private sector’s attempts to understand and serve its customers’ individual circumstances in and around Atlanta, the government has chosen to impose a single price for health insurance. The Obamacare Market Rules and Rate Review Final Rule (45 CFR Part 147) requires that the geographic rating areas for each state be limited to the Metropolitan Statistical Areas in that state plus the remainder of the state. The fact that Atlanta may have three or more pricing zones, or markets, is lost in the requirement that
…if a state requests geographic rating areas in excess of MSAs+1, then the state must provide actuarial justification, and must demonstrate how they will reflect significant differences in health care unit costs by rating area, lead to stability in rates over time, apply uniformly to all health insurance issuers in a market, are based on one or more geographic boundaries described previously, and will not be unfairly discriminatory.
Metropolitian Statistical Areas are defined by the Office of Management and Budget. Their boundaries are indifferent to how people actually might prefer to use and pay for health care services. In general, an area qualifying as an MSA must “have at least one urbanized area of 50,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.”
The following two maps make it easy to compare the nuances of the private pricing map with the federal government’s 2013 health insurance pricing map.
When will the government finally understand that it have no clue as to how to “run” an economy? Price controls, of any sort, always lead to market distortions and bad outcomes. This is another such example.
I think that the politicians and bureaucrats just enjoy the power and they have the arrogance to believe that they know what prices ought to exist. Sadly, they do not have to pay for the problems they cause. We do.
This is the issue with assuming they know what prices should be. The prices should be determined by analyzing the behavior while in a free market. Then you can determine buyers’ incentives for a product.
So basically the retailer in this case had to hire Boston Consulting Group to tell them what they should have already known — or easily should have known. Basically North and East Atlanta is more affluent than south and west Atlanta Metro areas. Residents of the North and East sectors are less likely to drive to chase after groceries that are 5% cheaper. Gosh, I bet the cars are newer in those sectors; the houses probably more expensive; the median income higher.
Right on Devon! There are bound to be obvious differences across municipalities, and even government bureaucrats need to realize as much and let the market adjust to prices accordingly.
“Price variations are important because they convey information about whether sellers are appropriately deploying resources to serve their customers”
This is very much true. This shows why free markets are so important, and how controlling prices can distort other wise accurate data on markets in a particular area.
“major problem with the regulation of U.S. health care is that those who populate government have done everything that they can think of to eliminate accurate prices and the information that they convey with the result that resource misallocation is a huge problem.”
And what they cannot see is the resource misallocation is their fault!
“Proponents of government run health care have an inexplicable disdain for geographic variability.”
What they don’t understand is that they need that variability in health care prices. Or else you can get the same priced care in San Francisco as you can in Houston. Because the cost of living differs, so should costs in health care and other goods and services.
CMS through Medicare use GPCIs – geographic practice cost index established for every Medicare payment locality for each area in the US so a Manhattan NY doctor is paid more than a Hattiesburg MS doctor. Don’t know why this concept doesn’t transfer over to Obamacare.
Because it makes too much sense. Remember, “fairness” and “equality” are the themes of this administration.