Friday, February 12, 2010

How's that free market-y insurance thing working out for ya

Economics teaches us to always consider the opportunity costs of alternatives--that is, not to just evaluate the costs and benefits of one outcome but also to consider the costs and benefits of alternatives. The health insurance reform debate could benefit from an opportunity cost approach.

Critics of health insurance reform rail against the potential harms and shortcomings of the Democrats' reform plans. However, they seldom mention the actual problems caused by the exisitng health insurance system.

A number of stories this week remind us that the status quo in the health insurance market has significant problems. In an earlier post, I linked to the story about the 39 percent rate hike that Anthem Blue Cross of California is imposing on its customers. At Slate, Timothy Noah relates how BlueCross BlueShield of Texas systematically rejects and discriminates against applicants with health issues. And yesterday, the advocacy group, Health Care for America Now, reported that profits for the five largest U.S. health insurers rose in 2009 by 56 percent (not bad for the worst recession in half a century), while the companies reduced private coverage by 2.7 million customers.

Collectively, the stories show that the critics' health care horror stories already apply to the current system.

Rationing. Critics of health insurance reform warn that the Democrats' proposals will lead to rationing. At the hysterical end of the scare-mongering spectrum are Sarah Palin's (and others') claims that reform would lead to "death panels."

Anthem's actions and the Health Care for America Now report remind us, however, that rationing already happens in the existing insurance system and more generally in health care markets. In insurance markets, rationing happens through movements in the price of insurance. As prices go up, insurance purchases go down, either through people buying less coverage or by people dropping insurance coverage altogether. The Anthem premium hike is an outrageous example; nevertheless, it is rationing.

Timothy Noah's story reminds us that rationing also happens in other ways, such as when insurance companies limit the payments that they will make, the customers they will enroll, or the services that they will cover.

Rationing also occurs when certain services simply aren't offered because a provider can't make a living or a profit offering them.

Critics (and proponents) of health insurance need to be upfront in stating that rationing will and must happen. Health care is costly, and its supply is not limitless. It's not feasible to provide as much health care as everyone might possibly want. Rationing isn't a matter of whether but rather a matter of how.

Somebody's hands are already probably on your health care. The critics' mantra throughout the insurance reform debate has been for the government to keep its "hands off our health care." The critics neglect to tell you, however, that many hands are already all over most people's health care.

For market-based insurance, the supply, conditions, and price of insurance policies are set by a few business executives whose primarily goal isn't to provide as much service as possible but to obtain the highest profit possible. If increased service and increased profit coincide, consumers win; however, if service and profits don't coincide, consumers' interests will be thrown overboard. All of three stories that are referenced about show how firms can actually increase profits while serving fewer people.

And this assumes that firms act in a rational way. Business owners are actually free to do as they want. Competitive markets act as a disciplining device, but they are a very harsh and imperfect device. If an owner does something and persists in something that the market won't support, the business fails. That provides a strong incentive to make profit-maximizing business decisions, but it doesn't prevent owners from making bone-headed decisions. If a bad decision results in a business failure, a lot of people can be hurt in the process. Thus, it's important to remember that one of the "hands" on private insurance policies is the "invisible hand."

You could lose your private insurance. In a market system, companies are free to offer insurance if they want to and mostly under the terms they want to. However, they are also free not to do these things. In addition, a company isn't compelled to offer insurance next year just because it offered insurance this year. If companies stop offering certain types of policies or go out of business, customers are left to fend for themselves.

Private markets provide lots of incentives for companies to supply products and services. When there are many potential suppliers and customers and when all of the potential market participants have adequate information about the goods being transacted, markets provide socially efficient outcomes on the whole.

Many insurance markets, however, have few competitors (are concentrated), which allows the existing monopoly or oligopoly suppliers to reduce the services that they offer and still enjoy a profit.

Also, insurance markets are characterized by asymmetric information. Customers have more information about their health needs than insurers. This can lead to certain types of insurance just not being offered at all.

Finally, as mentioned, competition, when it is applicable, often works through business failures.

Where does that leave us? The health insurance status quo is great for corporate profits. However, it leads our country to spend nearly twice as much per capita on health care than the next most expensive country. At the same time, it produces inferior health outcomes while still leaving approximately 46 million people in America uninsured and exposing many people to financial risk and bankruptcy.

The status quo redistributes income to the wealthy, costs too much, provides too little, and exposes people to unnecessary risk. To paraphrase Sarah Palin, that's how that free market-y insurance thing is working out for ya.

4 comments:

Pino said...

Health Care for America Now, reported that profits for the five largest U.S. health insurers rose in 2009 by 56 percent

Aggregate profit for those 5 insurers was 5.24%. Which means the previous margin was 3.35%. Hardly damning.

Critics of health insurance reform warn that the Democrats' proposals will lead to rationing.

Well, it won't lead away from rationing.

claims that reform would lead to "death panels."

The term is perhaps regrettable, but the point is real. There will be a panel that will decide when to restrict care leading to death. Today, that role is held by the family. Under the plan, this role will be held by government.

rationing already happens in the existing insurance system and more generally in health care markets.

This is true. And rather hypocritical of the Republicans clamoring against rationing. Then again, this hypocrisy has not stopped the Left from claiming the bill will actually save money.

Rationing isn't a matter of whether but rather a matter of how.

Very well said. Interesting quote from Munger:

an economist is someone who believes, sincerely believes as a matter of moral justice, that the infant mortality rate should be positive

Thus, it's important to remember that one of the "hands" on private insurance policies is the "invisible hand."

I am left with the implication that rather than the Invisible Hand you would prefer the State Hand?

If companies stop offering certain types of policies or go out of business, customers are left to fend for themselves.

If you call choosing Diet Coke or Diet Pepsi rather than choosing TAB "fending for themselves" I guess you are right.

Many insurance markets, however, have few competitors (are concentrated), which allows the existing monopoly or oligopoly suppliers

I have asked this (unfairly) to non-economic professional friends of mine. Can you name me a single monopoly that has existed that wasn't created by regulation? Even Microsoft wasn't a monopoly.

Where does that leave us?

Perhaps the front of the line of the whole world?

The health insurance status quo is great for corporate profits.

There are 85 other industries that have greater profits.

it leads our country to spend nearly twice as much per capita on health care than the next most expensive country.

Is this really a bug or is it a feature? America has more discretionary income than any other nation in the world. Given a choice of where to spend all of our extra money, does it not seem logical that we would choose to spend it on health care?

Or, looked at from another angle. Would you rather that we not spend money on:

1. Braces
2. Corrective eye surgery
3. Plastic surgery (though Pelosi makes a strong case against)
4. Cutting edge cancer treatments
5. Hair loss treatments?
6. Viagra

it leads our country to spend nearly twice as much per capita on health care than the next most expensive country.

We have argued this before, but I can't let it pass. There is not even the beginning of data that would suggest anything of the sort.

approximately 46 million people in America uninsured

Many of them are not citizens.
Many of them make significant amounts of money but choose to self insure.
Many of them are healthy as a horse and don't want to buy a product they don't need.
Many of them DO have insurance but just didn't know it.
Many of them already qualify, they just haven't taken the time to do so.

The status quo redistributes income to the wealthy

Actually, it redistributes income to the SUCCESSFUL, who then BECOME wealthy. Just being rich doesn't guarantee success in the industry.

Sorry for the long comment, but it was a long article.

I hope it formats correctly, if not, edit to taste and cook at 350 for 15 minutes ;-)

Dave Ribar said...

Pino:

Profits -- the profit figures actually understate what the companies earned. The profit figures don't include the firms' repurchases of their own stock (just over $5 billion last year) and millions of dollars spent lobbying and paying into PACs.

Death panels -- "perhaps regrettable?" How about completely misleading and far better than the practices that occur in the free market?

Hands -- The point is that someone's hand is and will be on the insurance market. In this case, the "invisible hand" (the market left to its own) fails, so yes a government hand is needed.

Fending for themselves -- A big difference is that Coca Cola and Pepsi sell to everyone and don't require a medical exam or medical history. If you get dropped or priced out by your insurer, you are back to square one with the next one.

Market concentration -- The insurance market is one of the most highly concentrated in our economy. Part of this is due to state-by-state regulation; part is also due to the anti-trust exemption that insurers enjoy (lack of regulation); part is due to consolidation in the industry (again, lack of regulation).

Pino said...

The profit figures don't include the firms' repurchases of their own stock (just over $5 billion last year) and millions of dollars spent lobbying and paying into PACs.

If those 5 firms are alone in purchasing their own stock back AND in lobbying, then you have a point. Until then, the fact that they do what all corporations do doesn't seem very relevant.

They are still only 85th on the "most profitable" list.

How about completely misleading

What would you call a group of politically appointed people deciding who does and who doesn't receive or not receive care?

The point is that someone's hand is and will be on the insurance market. In this case, the "invisible hand" (the market left to its own) fails, so yes a government hand is needed.

It seems to me that what you are really saying is that there is a moral imperative that people take care of other people. AND you think that the government should take up that role; being made up of people.

Of course I don't buy this any more than I would buy the idea of forcing you to contribute to the charity of MY choice.

A big difference is that Coca Cola and Pepsi sell to everyone and don't require a medical exam or medical history.

Insurance is just a method of paying for the actual care. You don't HAVE to have insurance to obtain medical care.

If you don't like the idea of spreading risk; then don't.

If you get dropped or priced out by your insurer, you are back to square one with the next one.

I am sure, positive, you understand the role of insurance. But to be clear, it is NOT the role of insurance corporations to provide you medical care. Right?

Part of this is due to state-by-state regulation

Very happy to hear that.

part is also due to the anti-trust exemption that insurers enjoy

I agree with you here.

Pino said...

Health Care for America Now, reported that profits for the five largest U.S. health insurers rose in 2009 by 56 percent

More here:

mjperry.blogspot.com/2010/02/health-insurance-companies-rank-88-by.html