• 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.

    • I am also skeptical of the power of consumers to fix our cost problems, but I don’t think one can use the current system (especially the employer-based system) as evidence of that. After all, employers don’t pay insurance premiums, employees do, as you’ve pointed out many times in the past. But the opaque nature of having employers purchase health insurance rather than pay higher wages, where the cost of said insurance is typically not very visible to employees, would tend to diminish the market impact of the transaction.

      I think of it along the lines of the work you’ve cited on Medicare Advantage, that while the plans offer additional benefits, consumers would not purchase those benefits at the price we pay for them. Group insurance typically has much richer benefits than individually purchased insurance, which might suggest that left to make their own decisions on purchasing health insurance those people would not buy so much. Many group plans more closely resemble prepaid health care than they do true insurance, and I’m skeptical that people would choose to buy so much were they given cash wages instead.

      As of yet we don’t have much evidence of what a more market-oriented approach would accomplish, because there is so little about our system that resembles an actual market. The individual market has too much turnover, too much difficulty in comparing products, and too much adverse selection to really give us an idea of what a free market would look like. Would a truly free-market system work for health care? I highly doubt it. But we don’t have anything resembling a free market now, so the failure of our current system is not the rebuttal to a free market approach many people suggest it is.

      Put simpler: I think that one can make a reasonable theoretical argument against a free market system, but I think there are far too many distortions in our current system to make an empirical one.

      • As always, Bernstein and I are talking about premiums for a standard plan. He says, and I agree, that some will buy less generous plans at lower premiums. But that’s not the same thing as lowering the cost of care (see evidence on CDHPs — perhaps some modest reductions in cost, but not much, and largely driven by selection).

        Anyway, see the update to the post. It doesn’t address your issues, I’m just noting that I made an addition (at the bottom).

      • I agree that buying less generous plans is not the same as lowering the cost of care. I think it can make an impact, but it is not the answer to all our problems. Things like elective back surgery, excessive use of diagnostic imaging, brand vs generic drugs, all of those are areas where we could lower costs by putting consumers more in control, but the bulk of our spending is on events that are the least conducive to consumerism.

        What is unknown is how some of those things could reverberate through the system as a whole. Could lower utilization of unnecessary/less cost-effective care from consumer-driven plans free up more physician supply for things like managing chronic conditions or providing primary care to those who are not getting it today? Could less demand for high-priced but marginally effective care result in a shift of physician supply into more needed areas? Could this shift in care delivery patterns help drive more innovation throughout the sector? These are all speculative, pie in the sky type questions, but I think that since there is no simple “just do X and we’ll fix health care” answer we’ve got to foster more experimentation and trial-and-error on a smaller scale to figure out what works. It might be slow and painful, but all of those charts projecting future medical spending consuming our entire economy look just as painful to me.

    • Speaking as an employer, I would love to able to buy cheaper health care insurance. I cannot find any. Good shopper or crappy shopper wouldnt matter, I dont have any options that are cheap.


      • Part of the reason for that is because as I mentioned, most group plans more closely resemble prepaid health care, not insurance. Health care is expensive, so paying for it in advance with some admin costs and profit tacked on gets rather pricey.

    • The problems could all be on the supply side and higher out of pocket could lead voters to attack the state medical boards and demanding a more reasonable and flexible supply of Doctors and Nurses.

      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.

      On the demand side we do not know what will work, government has not worked neither has more out of pocket nor insurance shopping. It may take much higher prices to get people to wake up to eliminating care that does not seem to work (http://www.overcomingbias.com/2011/05/beware-cancer-screens.html). Still letting the price run might be the best thing to do.

      BTW I wonder if part of problem is that health correlates with income and so we think that spending more on healthcare will improve health though it does not seems to.

    • There are 2 parts of our high spending on medical care, prices and the amount of care.

      I think that supply restrictions significantly contribute to high prices and indirect payment systems (Insurance and Government) contribute to overspending (though Robin Hanson makes a strong case that we over deliver care to show how much we care).

    • I think this post is a little misguided.

      There is ample evidence to support that consumers are sensitive to costs. For example, the following is taken from Deloitte survey.

      -Individual purchase – 83.5% state that insurance coverage is highly important in the selection of a hospital or treatment
      – Top factors that consumers consider important to
      hospital choice include insurance coverage (74%), doctor
      recommendation or referral (64%), hospital reputation
      (64%) and specialization in needed services (61%)
      -3 in 4 consumers consider premiums and
      co-pays as important when selecting a health plan; 2 in 3
      say that choice of providers impacts their choice

      So if patients and employers are not sensitive to costs, why do people look to insurance for guidance on treatment? because they do not want to pay higher out of pocket expenses. What is the number one reason in choosing health insurance, cost to the consumer. If employers are not looking for deals on health insurance, why do over 80% of employers plan on reducing their coverage and pass it on to their employees?

      I think this post is dead on concerning the lack of information for people and companies to be effective shoppers. As well, behavioral change is hard unless we have a dramatic event (like being footed a $10,000 bill). We cannot shop for everything in healthcare but some of it we can.

      I think we might have a false dichotomy going on here. I do not think it is either or. I think evidence supports a complex picture… may I say… a market of people going into healthcare looking for different outcomes.

      If I know and my friends know to go to a UCC over an ER room for headaches to tummy aches, I think the everyone can.

      • Being concerned about cost and shopping for the lowest price is not the same thing as having the ability to actually drive down the price level overall. My point is that in spite of all that you cite, we still have rapid premium growth. If you believe the answer is smarter shopping for deals, why do we not see that happening now?

    • I don’t understand Bernstein or Austin on this. If you switch to vouchers that do not cover the costs people were previously spending, it is a tax on households. Their demand for health care has to shift to the left. I don’t care how inelastic it is, with lower income you spend less. If each year the value of the vouchers grows at a slower rate than GDP then each year it is a tax on health care spending. So it should lower health care costs each year. You can argue that it is a bad, punishing policy, but how can it not reduce health care costs.

    • Dr. Frakt,

      There are always barriers:

      1- we do not know at what pricing level (25% of GDP or 35% of GDP) people will start “shopping”

      2- The information flows in healthcare SUCK!

      3- At what level of cost sharing will people start to take notice….

      4- Fear

      5- Previous behavior

      6- Market movers are “old guard”. People my age (23) want reform and want to shop.

      Dr. Graham makes a great point. We really do not know the market clearing price of healthcare. There is so many distortions, some of them organic some of them man-made (Stark etc.), that make it difficult to know what is the optimal level.

      This just came across my mind: If the hospital down the street does not know the price or cost of a procedure, should we really expect people to be excellent shoppers?… Interesting

      There is a disparity between what people want (more market based offerings) and how they act. I think it is because of the above reasons. It is hard to deny that people want more “shopping” in healthcare. It is vastly interesting to me in why people do not act upon this value. People are “shopping”, but it is in these peripheral areas.

      Thanks for making me think!

    • How much power do *most* employers really have? When it comes down to it, insurers are selling a commodity: per-person coverage.

      I think a retail analogy holds to a large degree: buying one can of soda is the most expensive per-unit way to do it; buying a case of 24 cans is somewhat less expensive per-unit; buying a shipping pallet of cans is least expensive per-unit. Someone buying pallets of soda can negotiate discounts; someone buying a single can… not so much.

      In the insurance realm, how many employers are really able to make purchase ‘pallets’ of policies? And the at the size where you’d see the most market influence, those largest employers frequently find that it’s cheaper to be self-insured.

      • Misses the point. Even the big, self-insured firms are not offering premiums that grow slower than the economy. The point is that health care costs can’t be tamed with a focus on insurance (self or not). Providers have to be part of the solution.

    • Remember the “managed care backlash” of the 1990’s? Premiums continue to rise faster than economic growth because in reality we really don’t want the insurers to implement controls that will bend the healthcare cost curve. We want access to all the bells and whistles of gee-whiz medicine, whether they actually do much to improve health or not.

      Government-level controls and insurer-level controls have been judged unsatisfactory, hence the resort to ratcheting up beneficiaries’ out-of-pocket payments.

      I am not necessarily advocating it, but a relatively generous FEHBA-style voucher program where numerous plans come in below the voucher amount AND the beneficiary pockets the difference (say something like $750) would end up shifting demand. Many folks would opt for the cheaper plan and pocket the $750 rebate. Of course, the cheaper plan would have higher deductibles and copays, smaller provider networks, and other coverage restrictions.

      The backlash came because employees didn’t feel they were getting any benefit out of their employers switching to more limited coverage (Also, some ham-handed techniques were utilized by plans). The lump-sum rebate is a lot more visible than shaving $40 off each month’s payroll deduction for health insurance which was the best-case managed care savings back in the 1990’s. Many Medicare seniors on fixed incomes would jump at the chance to pocket a rebate.

      Of course, on the supply side, we have the FDA approving new drugs and technologies on safety and efficacy grounds, and ignoring any cost considerations. The OTA got eliminated when it dared to raise questions of cost-effectiveness around medical devices. With no serious efforts in this realm, the R&D font will continue to spew out new care innovations with a minority of them generating strong value in health improvement for dollars spent.

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