Competition among private plans: Who is served?
Filed under: Health Benefit Costs, Health Care Plans, Insurance Companies
Our private health insurance marketplace works poorly. Commentators including Jacob Hacker, and many Democratic legislators, argue that the creation of a public plan to compete with existing private plans will assist in the dual tasks of improving quality and reducing cost inflation. Responding today to these assertions in a NYT Op-Ed, David Reimer and Alain Enthoven argue that there is a role for government in a reformed health finance system, but not as a market participant. Rather, they argue, it is as a regulator that government can cure the ills of our poorly functioning insurance marketplace. Implementing their vision might or might not benefit well, low-cost workers; it would not, however, help those with chronic illness and other high-cost insureds — those who need coverage the most.
Reimer and Enthoven argue that government-run exchanges can adequately address market failure in the health insurance market, allowing well-regulated private insurers to compete in terms of price and quality. The exchange would ease consumer comparisons of insurers by limiting incentives (tax or otherwise) to a benchmark created by reference to the lowest-price qualifying plan. As consumers would then be required to pay any excess out of pocket, plans would be incented to stay at or close to the benchmark price, driving cost pressure down to providers, thereby reducing health inflation. At relatively uniform prices, plans would presumably distinguish themselves by putting together “good, economical plans.”
The argument over whether the market for purchasing health insurance could operate in a classically efficient manner, at least absent distorting outside influences, is long-running. Enthoven has argued the affirmative vigorously and ably for decades. Tim Jost and others have argued that classical economic analysis is largely inapplicable to the market for health insurance because the timing of the purchasing decision confounds consumer decision-making, and because health care is a sufficiently special good that we are unlikely to hold people to their restrictive ex ante decisions as to coverage.
Let us for the present accept that a market for health insurance, well-regulated as Reimer and Enthoven suggest, can produce “good, economical plans” for the average consumer. This would occur because insurers would seek to enroll as many of these average consumers as possible, and to maintain good service and low pricing to keep them enrolled. But, as I described previously, there is a class of people insurers would not welcome. Health care costs are heavily concentrated in the sickest 10% of consumers, and many of the most expensive users are easily identifiable in advance because they have chronic illnesses. Rational, self-maximizing insurers would shun these consumers absent some risk-adjustment payment Reimer and Enthoven do not mention, and that indeed appears not to exist to an extent adequate to reasonably combat insurers’ selection bias. Insurers can be required to offer them coverage, even to provide coverage for chronic care services. But will rational, self-maximizing insurers serve them well, left to their own devices? Why would they, if they could discourage their patronage by providing lackluster care coordination, home care, physical therapy, and other services that are markers for expensive chronic illnesses? We ought not rely on self-interested market participants and expect them, all else being equal, to act contrary to their own self-interest.
Competitive private markets for health coverage might make sense if health costs were homogeneously spread, or even if high costs occurred unpredictably. In a world where a large number of Americans are predictably poor bargains for insurers due to known chronic conditions, we need, as an option, an entity whose sustainable, reliable mission is to provide good, economical coverage for those who most need care, and who incidentally represent a substantial portion of our health care budget. If committed public plans show the way to excellent chronic care coordination, we will be able to judge the efforts of private insurers in this important regard; otherwise, the needs of the chronically ill can too easily be swept under the rug.
Posts from Health Reform Watch have been cited by media sources throughout the country, including The New York Times, Washington Post, L.A. Times, Kaiser Health News, The Health Care Blog, NPR's Planet Money Blog, Duke Univ. Med. Center News, American Health Line Alerts, BusinessWeek.com, Concurring Opinions, Balkinization, The New England Journal of Medicine, Harvard's Nieman Foundation for Journalism, Las Vegas Sun, Maggie Mahar, Ezra Klein, Tom Geoghegan, and the official homepage of the Office of the Democratic Majority Leader of the House of Representatives, Steny Hoyer.
