Wednesday, March 31, 2010

The "competition" thingy in healthcare

One common right-wing meme is that the whole problem with healthcare costs is the middlemen. People don't care what healthcare costs because their health insurers are paying for it, and they don't care how much their insurers are paying for it because their employers are paying the insurers for the insurance.

So, is this true? Well, there's an easy way to test it. If it's true, then the uninsured -- who presumably do care what healthcare costs -- will shop around and pay less for healthcare than the insured do, since they have a financial reason to choose cheaper healthcare. So let's go look at the prices that the uninsured pay for health care, they'll surely be less than what the insured pay, right? Err... no, wrong. The uninsured are routinely charged up to four times more than what insurers pay for the exact same procedures.

So that middleman thing just doesn't work. If the middlemen were the problem, if the insurers were the problem, if competition worked in healthcare, the uninsured would pay LESS, not four times MORE, because competition would allow them to find less expensive healthcare. But that doesn't happen. How can this be, you ask? Well, it's simple. What costs most money is not the routine family health type stuff. You going to your family doctor with the sniffles doesn't cost a lot of money. What costs money is the big procedures, the stuff to treat life-threatening illnesses, where it is literally your money, or your life. And since people value their life more than they value their money, they fork over their money.

In the end, competition in the healthcare field is about as real as the Tooth Fairy and Santa Claus -- it just doesn't happen, because of the "your money, or your life" nature of the business. Might as well talk about competition in the field of Central Park muggings at that point. That is why I think insurers have been unfairly demonized by both the left and the right -- they're trying to police the Central Park muggers, and yeah, they need to be regulated because they're also taking out some of the pedestrians on the sidewalks too by firing at will in all directions like an Iraqi Army unit taking sniper fire (the so-called "death blossom"), but the core issue with health care costs here is providers with the power of life and death using that to extract people's wallets, not insurers or middlemen or anybody else.

- Badtux the Health Care Penguin


  1. I beg to differ with you here Penguin. It was quite obvious who was rolling in the dough when insurance companies made $146 billion in profits last year with CEOs making millions in bonuses. And the reason there was no public option was that the hospital lobby put an end to that.
    And if insurance companies are "competing" then why aren't they lowering premiums instead of raising them?

  2. Healthcare is a $2.6 TRILLION industry in America, and the $146B in profits last year was quite unusual -- that is approximately a 16% profit, and insurer's profits have averaged more around 5-6% with MLR's (Medical Loss Ratios) of around 90% (i.e., for every $1 coming in, 90 cents went out to providers) for most of the past decade. In a sense last year is what made it possible to regulate medical loss ratios this year -- last year will be impossible to repeat again. Also is the issue of *why* the health care industry raised rates so high last year -- it's because the value of their reserves plummeted due to the crash of the stock market and the crash of the mortgage-backed securities market, and the majority of that profit went into reserves to re-build them to meet foreseeable future losses, not into their executives buying gold bathroom fixtures and gold tiled floors for the executive suite.

    As for why rates keep going up -- it's because payouts keep going up. As I noted above, MLR's (Medical Loss Ratios) averaged close to 90% for most of the previous decade. For most of the previous decade rate hikes happened because providers kept charging more and more -- not because insurers were making gigantic profits.

    In short: The insurance companies have done some evil shit over the past decade in their attempts to police provider costs that have gone completely out of control. But they're not the ones causing provider costs to skyrocket. That's the providers themselves, who, in the case of treatments for life-threatening illnesses, have infinite bargaining power -- "your money, or your life" -- and without the insurers trying to police them, it'd be like a Central Park mugger-fest out there. What we really need are some real cops on the beat like what the French have -- have the Department of Health and Human Services get together with the AMA, American Hospital Association, etc. to set reimbursement rates and drug prices and maximum physician salaries -- but short of that, the insurers are the only cops we have on the beat right now, even if they are largely mall cops with delusions of grandeur who shoot themselves in the feet or shoot innocent bystanders more often than they manage to rein in abusive providers who mugging people with "your money or your life".

    In short, the insurers need to be regulated because they're managing to hurt too many innocents while trying to police abusive providers -- but they didn't cause this mess, and I think they're getting unfairly blamed for this mess by both the left and the right.

    - Badtux the Healthcare Economics Penguin

  3. Except that the insurers DO keep building gold bathroom suites etc. Not to mention that the reimbursement rates at EVERY major insurer wen down for the, I think 9th straight year.

    MLR's are slippery. At least some companies use extremely creative accounting to justify the numbers, and all so their best to stick everything but the sink into the calculation. But EBITA is up sharply, and not just last year, and I feel that this gives a better picture.

    Maybe we have different views of what a provider is. Recently, I was hospitalized for 2 nights, a CT scan and a 20 minute surgery. Hospital charged 18,000, insurance paid 1800, I paid 100. So where did the balance go? My insurance co reported that 17000 difference as negotiated discount, but the hospital never saw it, so it can't be that the hospital is raking it in, either.

    Where is the money? IMU ~40% of every health care $ goes to some form of overhead, either at the insurance co, the broker, the hospital the doctor's office. That can't be put at the feet of the providers.

  4. I'm glad you recognize that the insurance industry is not raking in record profits. We in the tech industry make more profit then health insurance companies.

    The idea though that prices would sky rocket even more without a middleman is bogus. It is *because* of the middlemen that the uninsured are price gouged. The critical mass in the current system is behind the health-care reimbursement bureaucracy. The uninsured are outside-of-process. But if we fix the system as I suggest then the critical mass will change to price-transparent competitive model. In other words Badtux, you're also shooting the wrong messenger.(you absolved the insurers but shot the providers) Both providers and insurers are dealing with a 4-way complex mess (provider->insurer->employer->patient). Let's see the forest, not the trees.

    I fully refute your gun-point analogy here It doesn't hold water. Even though I concede that we need middlemen for high-stakes catastrophes, you'd be surprised how many hospital visits even for big-time surgery are schedules way in advance which shows that people do have time price-shop if we had a system that encouraged price transparency.

  5. Hi Nathan, hope you don't think I'm ignoring you, my main computer (my Macbook Pro) had a hard drive crash yesterday and I've been busy getting it all sorted out. I'll try to respond in detail this weekend. Needless to say I think you're ignoring some realities of the situation but am still busy doing recovery activities to get all set up again so will talk more about that later.


  6. Good luck with your computer project. I've been trying to prepare for disk crashes myself. I just got a nice back up system going this week. I'm using DeltaCopy (windows wrapper around rsync) to duplicate all my data, photos, and family videos out to an external 1TB drive. It's working great so far. It's better than disk mirroring if you can tolerate a day's worth of loss.

    If you read my thoughts on the gun-point analogy, I should clarify that I agree with you that providers do have a bit of a corner on the provider market. Corner=gunpoint. But my solution is to break the corner. Not by mandates or price controls, but through freedom. So your gunpoint analogy holds if you are not willing to let the free market operate on the supply side. But it doesn't hold if you insist that both buyers and sellers come to the market freely. Obamacare doesn't do much for the supply side as far as I can tell, so we're going to throw millions of more users into the system without adding providers. The providers will raise prices to ward off excess demand, liberals will cry foul, and then enters government rationing. I'd rather solve this thing the freedom-based way.

    The gun-point analogy is based on the current non-free-market system and is no proof that a free market system will fail just because health has near infinite value to people. (Food and water also have near infinite value when somebody restricts supply)


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