If consumers are such good shoppers, why do health insurance premiums go up so much?

Once again, I agree with Jared Bernstein.

[I]f people want (demand) a particular quantity of something, whether it’s an insurance package or a Snickers, they have to pay the market price to get it.  If they bring less than the market price to the seller, all else equal, they will get less.  Of course, if demand contracts–people want less insurance or Snickers—the price will fall.  But it’s unlikely the demand or need for insurance coverage will decline much at all.  (Those who suffered through econ 101 will recall that the first case is sliding down a demand curve; the second, a shifting in of the demand curve.)

In the general case, in other words, people are “price-takers” not “price-makers.”

This is all in the context of vouchers for Medicare beneficiaries, the idea that we can exploit their savvy shopping skills to drive down the price of insurance and, in turn, the price of health care. If you’re thinking the logical linkages in that sentence seem weak to non-existent, I’m with you. It’s not my plan, and I can’t explain how it is supposed to work.

There’s a very simple way to intuit that it will, in fact, not work. If consumers were so good at buying health insurance, we’d be getting good deals right now. Maybe the reason we don’t is because, for most subject to the commercial insurance market, employers are in the middle. But don’t employers want good deals too? Of course they do! Moreover, they have more market power to get them than do individuals. That must count for something.

Now, as far as I’m concerned, there are good reasons to involve private insurers in the health care cost solution. The first is that they wield so much political power, they’re not going away. They must be part of the answer or we won’t have an answer. Second, there is value in choice, and I do think it is reasonable to presume that the government will not provide the variety of choices consumers may want. However, we should not overpay for that choice.

For all that, I have not seen a lot of good evidence that the private health insurance market, driven by consumer (or employer) decisions, leads to slower growth in health care costs. As best I can tell, we have the answer to that question. That’s not to say government has done a good enough job either. It is only to say that we should not expect great things from a plan that relies entirely on turning Medicare beneficiaries loose in the market.

LATER: Some will say that the problem with insurance markets is insufficient competition. There’s something to that, but not as much as one might think. First, the answer is not allow insurers to sell across state lines, not if states are in charge of regulating the market. As Aaron explained, that just makes no sense. Second, how much does insurer market concentration contribute to premiums? Some, but not a lot. Moreover, once market concentration is stable, it should not be a factor in premium growth. Lastly, there are reasons to believe insurers with large market power serve to counteract the monopoly power of hospitals.

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