Friday, November 23, 2012

Fwd: qotd: Health insurance exchanges may be too small to succeed

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-------- Original Message --------
Subject: qotd: Health insurance exchanges may be too small to succeed
Date: Fri, 23 Nov 2012 08:30:53 -0800
From: Don McCanne <>
To: Quote-of-the-Day <>

The New York Times
November 23, 2012
Health Insurance Exchanges May Be Too Small to Succeed
By Dana P. Goldman, Michael Chernew and Anupam Jena

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

Certainly, it is hard to be against competition. Economic theory is
clear about its indispensable benefits. But not all health care markets
are composed of rational, well-informed buyers and sellers engaged in
commerce. Some have a limited number of service providers; in others,
patients are not well informed about the services they are buying; and
in still others, the quality of the service offerings vary from provider
to provider. So the question is: What effect does insurer competition
have in a marketplace with so many imperfections?

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

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

So health insurance exchanges are probably welcome news for hospitals,
physicians, and pharmaceutical and medical device companies throughout
the United States. If health insurance exchanges divide up the market
among many insurers, thereby diluting their power, reimbursement rates
may actually increase, which could lead to higher premiums for consumers.

There is some evidence on how insurer market power affects premiums.
Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayanan have found
that greater concentration resulting from an insurance merger is
associated with a modest increase in premiums — suggesting that
concentration may not help consumers so much — although they did report
a reduction in physician earnings on average. Over all, however, the
evidence is limited and mixed.

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

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


NYT Reader Comments:

Don McCanne
San Juan Capistrano, CA
Nov. 23, 2012

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

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

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

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

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