Unhealthy healthcare: insurers

Posted: 25 August 2016 in Uncategorized
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The Wall Street Journal refers to it as “insurers playing a game of thrones.”

Big U.S. insurers are courting one another for possible multibillion-dollar deals. How they pair off could have significant implications for the managed-care industry, its individual and corporate customers, and U.S. medical providers. . .

“Usually, fewer competitors means prices will be less advantageous for consumers,” saidGary Claxton, an insurance expert at the Kaiser Family Foundation. “It probably means they’re going to be in a better position to maintain their margins,” he said.

Given the high costs of U.S. healthcare, insurance is obviously the way most Americans are able to gain some kind of access to the health system.

According to the latest (January–March 2015) National Health Interview Survey (pdf), about two-thirds of Americans below the age of 65 rely on private health insurance. The rest either don’t have health insurance coverage (10.7 percent) or have some kind of public health plan (24.2 percent).


The problem is, even without the latest proposed mega-mergers, the U.S. private health- insurance industry is already highly concentrated. Treating Blue Cross Blue Shield (BCBS) affiliates as a single industry (since, with few exceptions, they have exclusive, non-overlapping market territories and hence do not compete with one another), and adding in Anthem (which operates the for-profit Blue plans across 14 states), the national market share of the four largest insurers increased significantly from 74 percent in 2006 to 83 percent in 2014. By comparison, the four-firm concentration ratio for the airline industry is 62 percent.


Much the same process of concentration has been confirmed by examining the so-called Herfindahl-Hirschman index.* Health insurance, as shown in the red line in the graph above, is the most concentrated industry (compared to, for example, hospitals and telecom). With a current index near 4,000 (having risen 79 percent between 2000 and 2014), and some states with indices exceeding 8,000, health insurance is easily considered highly concentrated.


It should come as no surprise that growing concentration in health insurance (based, mostly, on mergers and acquisitions) has meant both lower payments to providers (like physicians and hospitals) and higher premiums for payers (both employers and individuals)—thus boosting health-insurance profits.

So, within the U.S. healthcare system, Americans who don’t qualify for public programs are forced to rely (directly or indirectly) on a private health-insurance industry that is increasingly concentrated (and, if the proposed mergers go through, will rise even higher on the Herfindahl-Hirschman index) and is able to dictate both prices and the quality of policies.

Right now, if private health insurers suffer losses (as they claim has been the case under Obamacare, when they can’t pick and choose the healthiest customers in the exchanges), they can take their ball and go home. As James Kwak explains,

The obvious market-based solution is to keep increasing the penalties for not being covered until enough healthy people join the pool so insurers can make profits. But all that accomplishes is shifting more of the overall losses onto healthy people.

The obvious alternative is to reap the benefits of the current level of concentration and transform the existing private health-insurance programs into a public single-payer system.** That would succeed in creating universal coverage, lowering healthcare costs, and redistributing the losses across the society on the basis of an ability to pay.


*The Herfindahl-Hirschman Index is used by the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission to evaluate the potential antitrust implications of acquisitions and mergers across many industries, including health care. It is calculated by summing the squares of the market shares of individual firms. Markets are then classified in one of three categories: (1) nonconcentrated, with an index below 1,500; (2) moderately concentrated, with an index between 1,500 and 2,500; and (3) highly concentrated, with an index above 2,500.

**It’s possible, of course, to imagine a middle ground, with higher marketplace subsidies for purchasing private insurance, stricter penalties for individuals who aren’t interested in purchasing insurance, and a limited government option. But that’s just an attempt to juggle the parameters of the existing institutional structure, without recognizing and overcoming the social costs of a system based on private health insurance.

  1. Insurance isn’t even the right financial tool for the job. The job of insurance is to construct a risk model, sell it for the expected average cost + margin, and then compensate customers for random adverse events within the model and the coverage period. Works for car insurance, space flight, or commercial shipping. Health insurance could be pretty lean and competitive if that’s what health insurance did.

    If health insurance actually was insurance, insurers and providers would construct a risk model, as accurate and using as much data as possible, for a specific individual over a short time period. Say given all my recorded and easy to measure personal health data, what’s the expected cost of treating me personally over the next five years, for both existing and unforeseen conditions. A competitive healthcare, health technology, and actual insurance sector could evaluate and price that really well. We could even turn it into a computer model that can be sold in exchanges and bid automatically, without any human getting to see privacy-sensitive data.

    The problem is that “expected cost over five years” would vary widely between individuals, demographic groups, genders, and ages. Another problem is costs may on average be too high, but that’s due to issues elsewhere in society or healthcare so let’s park it.

    If we wanted to use capitalist financial insurance to insure people’s health, contracts would be short (a few years) so that the risk can be assessed, they’d be making maximal use of personal health data, and they’d be bid on free exchanges to reach the true marginal price. Instead, we’re trying to force pretend-insurance to offer long or lifetime contracts, keep contracts as insensitive to health data and personal risk factors as possible, and use an array of subsidies and penalties in order to force premiums into a reasonable range. No wonder there’s both capture and inefficiency.

    The trend seems to be to try to turn so-called insurers into social transfer mediators, forcing them to cover entire populations to make the economics work. Good, but I don’t see why private capital has any role in that. How are so-called population insurers supposed to be efficient or to compete? Better actuarial models? Are they going to be that different? Reduced transaction costs? Do they matter if coverage is universal? It comes down to customer service niceties and advertising, like utilities and phone companies. Of course the bulk of the money is made misrepresenting or excluding tail risks or otherwise trying to mis-price in aggregate.

    If that’s where “insurance” is going, it should just be replaced with a public bureaucracy that does the job of universal social transfers better. We need that anyway. The radical alternative, or rather complementary approach, is to actually use smart insurance and diagnostic tech to model individual risk, treat people for the best outcomes including prevention, and actually insure them from the random onset of health events. There’s a role for actual insurance in healthcare, but it’s very technical, efficient, and small.

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