• A profile of health economist Leemore Dafny

    Colleagues say Dafny’s examination of health-insurance markets has helped mold the state and federal exchanges that are central to President Barack Obama’s 2010 health-care law, which allows qualified individuals and small businesses to purchase coverage. Her studies show a lack of competition in insurance markets drives up premiums, part of the reason “the goal is to get more than half a dozen plans in each exchange,” said David Dranove, director of the Health Enterprise Management Program at Northwestern University’s Kellogg School of Management. “Leemore identified that just having two or three plans in a market is just not enough.”

    I recommend you read the rest.

    Here’s a TIE post about her work on the effect of consolidation in the insurance industry premiums. Here’s one on the value of choice among plans. Leemore has done important and creative work. I’m proud to know her.


    • I find this argument contrary to evidence. We know that consolidation among hospital providers has been underway for some time, and consolidation among physician groups continues as well, driven by the effort to create Accountable Care Organizations. This has given providers greater bargaining leverage relative to insurance companies. We know that insurance companies with more covered lives are able to negotiate lower premiums for the same benefit package, than insurance companies with fewer covered lives. Therefore competition necessarily weakens an insurance company’s ability to obtain lower prices. It is the opposite of competition – monopsony – that appears to obtain the lowest prices as no insurance company can obtain hospital prices as low as Medicare, drug prices as low as the VA, or drug rebates as great as state Medicaid agencies.

      Per capita health care spending is a function of (utilization x price). If an insurance company is unable to negotiate lower prices, that leaves only utilization as the remaining mechanism for lowering costs. Lower utilization can only be realized through cost sharing, to discourage beneficiaries (the healthy and the gravely ill alike) from accessing medical services, stinting, and risk selection. None of these are likely to contribute positively to the overall health of the population we want the insurance companies to cover. Some would argue that the medical management provided by insurance companies lowers cost, but evidence to support this contention is mixed at best, and usually accompanied by many caveats and conditions.

    • This sentence in the Bloomberg article summarizes the operating theory behind Ms. Dafney’s belief that competition lowers costs:

      “She used the 1998-2005 data to determine that insurers charge more profitable businesses higher premiums, a relationship strongest in geographic markets with a small number of carriers. Beyond higher costs, scant competition also probably causes “a lack of innovation,” she said.”

      This assumes (1) that insurance companies have large profit margins that they are able to decrease to be more competitive (2) that the plans are generally administratively inefficient and can improve their medical management, and require the threat of competition to find innovative means of improving their operations.

      I think that’s a lot of assuming. How do we know that large profit margins exist for all insurance companies, or will remain in the face of higher prices charged by providers and the inclusion of a more clinically complex population once the prohibition on denial of coverage to persons with pre-existing conditions goes into effect? How do we know that shareholders and investors are willing to tolerate lower profit margins? How do we know that insurance companies are administratively inefficient or require more innovative medical management? Isn’t there an up-front cost to innovation, and how much of that innovation is actually being funded, and their costs masked, by large amounts of indirect and direct government subsidization?

      • When I read the article, I wondered the same.

        However, without reading her work (I have not), you dont know if she adjusted for market segmentation, provider organization (many vs few), and product lines.

        The marketplace not easy to wrap your arms around, and without context, you make many assumptions, perhaps prematurely.

        Conversely, if she posits competition rules despite adjustment for known independent variables, I guess I have something more to learn.


      • There are obvious inefficiencies in insurance company administration. I’d say a good third of my bills (mostly for mundane things) need either me or some one from the provider to discuss, dispute and resubmit.

        Listen to providers gripe about the time and staff spent dealing with it. If doctor spend less time on paperwork, there’s more time for them to treat patients, leading to a lower per-patient cost.

    • There is an internal contradiction in the logic that more competition leads to lower costs while less competition encourages companies to the raise premiums they charge purchasers. Eventually a truly competitive market is going to winnow out the weaker participants, leaving only a few winners standing. According to Ms. Dafny’s research this will place the last few standing in the position to exert leverage over purchasers once again.

      This winnowing is likely to happen among health insurers because the Affordable Care Act is going to abruptly change the business model they follow, from one of risk avoidance and risk management, to one of medical management and care coordination. They will need to build out their provider networks, develop medical homes with improved primary care, analyze their clinical data more closely and initiate appropriate interventions for high risk/high cost members, hire nurses to oversee disease management activities, analyze their utilization to differentiate between high value and low value services and procedures, etc. No doubt some of the larger, nation-wide health insurers have initiated these activities already, but it’s also likely that many others have not and have until now been getting away with providing the bare minimum. We should we expect them to fall by the wayside. That is unless we intend to have government prop them up the weaker insurers with inflated payments to create the “appearance” of competition and/or tolerate a new tier of lower quality coverage for a segment of our population.

    • The other developed nation’s of the world spend 13% or less of their nation’s economic activity on healthcare. We spend 18%. For 2010, the difference amounted to $650 Billion for that year alone. Sure, there is fraud, excess profits, administrative burdens and plain old substandard health care. But, together it is unlikely to represent any more than 50% of $650 Billion, At 50%, it is certainly not a trivial number. What then represents the essential contributor to the inefficiency. I propose that the difference between our nation’s healthcare industry and the other developed countries lies in how accessibility in organized. Basically, we have no nationally sponsored means to assess and mediate local initiatives to sponsored improve healthcare accessibility.

      Take maternal mortality, for example. The United Nations published last year their most recent world-wide evaluation of progress to reduce maternal mortality (as of 2010). Our nation ranked 38th worst among the 43 developed nations of the world. And yet, there are four states who have had maternal mortality rates that would rank among the best ten nation’s of the world. One of these states is ALASKA. Ok, so why don’t we do a case study of these four states and engage the other 46 states in a “race to the moon” to reduce maternal mortality. A public health dimension will be required.

      Oh, yes! I read the Strunk and White “Elements of Style” every one to two years. Its an effective immunization for my “WHICH” relapsing disability!

    • Jeff Levin-Scherz, “Managing Health Care Costs” writes:

      “I don’t think that health plan competition will deliver low prices –but first, let’s talk electronics. I’ve shown an image of the cost of an entry level iPad 4. You’ll see that there is vigorous competition in my zip code – but the range of prices is pretty slight. That’s because Apple is vigorous in enforcing a high wholesale price, and this limits the ability of retailers to discount.

      Health plans face the same problem. The providers deliver the “product” – and they insist on high prices. Almost all the health plans in most markets have the same networks – much as all the electronic stores want to sell genuine Apple iPads. More retailers might mean more convenience, but it doesn’t lower the price.

      ..I believe we need more effective competition among providers who are actually delivering the care, and who represent 85% of the total health care cost. ”