The Competition Conundrum


The meme of competition underlies every conservative healthcare reform proposal, so much so that it has taken on a sacred nature. I notice that many progressives tend to side-step this one—yes, they argue outcomes, but not necessarily the fundamental concept that competition is the root of all good, in every transactional system. Maybe that’s because it’s just hard to fight a meme like this. When it comes to varieties of flat-earthers, facts can be beside the point.

I had a comment on my last post that I was ignoring basic economics by not understanding that the laws of supply and demand, with enough competition, would by necessity result in lower prices and higher quality. So I thought it would be worth a try to look at a few factors in health insurance that are different from the basic market principles for things like pizza or haircuts. Remember I’m not an economist, so I’m going to stick to the easy stuff—the basics.

First of all, when someone is trying to sell us pizzas, the goal is to balance the price and quality to maximize the chance most of us will come back. If organic tomatoes, at a higher price, don’t affect our desire for more, they won’t be in the sauce. The sellers also need us to eat as much pizza as possible. In contrast, a smart health insurance company wants us to buy their product but not to actually use it. That is the only way they can make the increasing profits shareholders demand. Remember we aren’t their only customers—shareholders count too. This is really an unusual economic setup, when you think about it, so it would be simplistic to think “basic” economics would work.

So how can they entice us to buy a product but not use it? You might think they would try to keep us healthy, but other tactics are far quicker and more lucrative. First, they use tricky wording to hide the fact that they don’t cover certain services we might assume would be covered. Some diagnoses, unless we are medically trained, would be completely unfamiliar to us. So we might see an illness in the contract under excluded conditions and have no idea this mattered. Then they throw multiple layers of roadblocks in our way. Provider networks and formularies keep their costs low partly because some customers will decide to pay a higher price out of pocket for a better doctor or medicine. Denying claims or authorizations initially and then “realizing” there was an error if challenged lets insurers cheat customers who never catch the error. Even those long, convoluted phone trees to get prior authorization or protest a claim denial (“press one if you want to bite someone”) make some patients give up in frustration. I could go on and on about these tactics but have discussed many in previous posts.

Now let’s look at haircuts. Same thing as pizzas, in that my barber (yes, I have a barber and think she is awesome) is motivated to give me a haircut that makes me want to come back, and also hopes I’ll tell my friends about her. But the price of a haircut, if you ask any woman, does not depend only or maybe even primarily on quality. It depends instead on the cache of the salon—the area of town, the type of clientele (helps if some big-wigs go there, pun intended), the décor. I’ve seen plenty of women walk out of trendy salons with very ordinary hair. If they were bad cuts, of course people wouldn’t go back—but ordinary turns into glamorous if you get to share hairdressers with the women who buy $500 shoes. Or maybe with John Edwards. This same principle holds true with pricey wines. Tasters who drink wine poured from a fancy bottle give much higher ratings than they do to the same wine poured from a bottle labeled Mad Dog.

So competition does not always result in the best quality, even in non-insurance products—there are too many factors other than quality that play into demand. Insurers borrow this principle in their Medicare Advantage plans, marketing products that have great names or have cool perks like health club membership discounts but fail to offer quality coverage for serious illnesses. I’ve seen a recent insurance commercial talking up the friendly nurse a new cancer patient can call to get treatment options (I guess instead of talking to the oncologist). Never mind that this nurse has an interest in keeping your care cheaper for his company. The company doesn’t care if the sickies leave and don’t come back—it works just fine to keep only the customers who don’t have to use their product. Apparently negative feedback does not lower insurance market value much. Maybe the dissatisfied customers are too sick or too dead to make noise.

Risk pool size also makes competition an ineffective way to lower prices. If we had a very competitive market with lots of insurers, and no large companies dominated, each risk pool would be smaller and more vulnerable to effects of a few unlucky customers with expensive illnesses. Premiums would have to increase to compensate in those pools, and healthy customers without pre-existing conditions would migrate to another pool at lower cost. Using the pizza analogy again, customers who didn’t eat the pizza would try to find pizza places where no one else ate it either. If someone did eat it, the others would be better off if that person got food poisoning and never came back. Eventually we’d wind up with sick people in plans they couldn’t afford anymore. Of course, free market proponents would remove all the new health insurance reform features, including protection for pre-existing conditions and price controls, in the service of the god Competition.

Do folks really want the natural outcome of competition in health insurance—products the sellers don’t want them to be able to use? Do they value a principle like competition, whether it works or not, more than coverage when they are sick? Are they ready to constantly scramble from risk pool to risk pool when prices rise? And to pay through the nose when they get sick and the well folks run away, along with their premiums?

All this reasoning has limitations. I know from experience in medicine that things don’t always work the way it seems they should. We used to think babies were safer sleeping on their stomachs, until we looked at the data and found out they were 10 times more likely to die. So if you want to ignore everything I just said, fine—look at what happens in the real world. We have plenty of examples of states with multiple competing products and states like Alabama with one heavily dominating company. And insurance is expensive everywhere.

We might not be able to overcome the religion of competition. Maybe we’ll just have to borrow it for our own purposes. If we had a national health insurance, an improved Medicare for all of us, we could access it for preventive medical care or early treatment. Paying well for this type of care, and maybe even treatment for obesity and nicotine addiction, would become the best way to lower overall costs. We wouldn’t have to pay part of our premiums for advertising brochures and commercials, customer service people who get paid to confuse us, high-salary executives or shareholder profits. We could have the largest risk pool possible, making our individual payments the cheapest. Because of this, our pizza businesses, hair salons and automobile makers could save money, by not having to fund private insurance and by having healthy, productive employees. They could—guess what? Compete!

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3 Comments

Filed under Bad solutions for the uninsured

3 responses to “The Competition Conundrum

  1. CCR

    You’re right in one thing: you are comparing apples to oranges. How about looking at — instead of pizza and haircuts, which you admit do not have the same dynamic as health insurance — car insurance. Admittedly health and car insurance are very different animals, but they both share the feature that they want customers to buy their products but not use them.

    Now, car insurance is a very competitive market, with dozens or even hundreds of companies vying for your business. You have myriads of services who exist just to check insurance rates and find you the best one. You also have consumer review sites where people can post about their claims experiences, so you can pick a company that will be there for you if you need them.

    Contrast that with the existing market for health insurance, where the states limit which companies can compete. You mention Alabama. Don’t you think you’d be better off if dozens of health care insurance companies were allowed to offer a variety of plans to fit the desires and budgets of Alabamians?

    And unlike your straw man, I don’t want to do away with the mandate to buy insurance, nor the ban on discrimination for pre-existing conditions.

    My concern is that if we have single-payer, we will have no recourse if we don’t like what we’re offered. There will be nobody else to turn to if our treatment isn’t covered, or if the wait times are too long, or if we’re given shoddy care and want to sue for redress.

    The profit motive is a powerful incentive for businesses to listen to their customers. People vote with their dollars for the services and companies that give them what they want and need. Without competition and the profit motive, we are at the mercy of bureaucrats who care only about the bottom line and not about the needs of the patients or the wisdom of the doctors. Single-payer is like the worst HMO ever, without a chance to switch providers once you find out how sucky your coverage really is.

    • Health insurance is not really like car insurance at all. Insurances don’t pay for “sick” cars, even ones that have problems that could lead to collisions, and they don’t pay for checkups. They pay when you have a crash! Same as life insurance. There isn’t really another type of insurance out there that fits the same model as health insurance.

      Again, multiple insurers wouldn’t help, not only for the reasons I gave, but because we already know they don’t work. Look at the states that have bunches of insurers competing and you will see it for yourself. Alabama does have several competing in the invidividual market (not the employer provided plans), and that type of insurance is the most expensive of all. None of the competition has helped a bit. And it isn’t just because the cost of the services itself is so high– the medical loss ratio for individual plans is the lowest of all (some of them spend only half of your premium on your care). This experiment has already been tried, and it is a flop.

      I understand your concerns about having one insurance, but what do we do when we have other things we don’t like– when our police departments or boards of education aren’t up to snuff? We still have the political process. If we reformed campaign financing it would help us have more control as voters. We are not stuck with the way things are.

      If only a portion of us have government plans, especially if these are for marginalized groups, it would be risky. But if we all have them and decide we want them to work right– that we’ll fix problems rather than getting rid of the whole thing– single payer has the potential to work very well. If on the other hand we can’t convince the majority of conservatives that they would benefit, they will do what they have done to other government programs they don’t like– screw them up with a bunch of red tape that fulfills the prophecy of failure.

      The profit motive works for some businesses, but it is not working for health insurance and has never worked. This is an example of clinging to a theory instead of looking at what is happening. Right now, as we speak we are “at the mercy of” insurance executives “who care only about the bottom line and not about the needs of the patients or the wisdom of the doctors.” That is a beautiful description of the problem! I experience it on a daily basis in my office. It was not caused by lack of competition or opportunity to profit. It is the nature of the beast.

  2. We tried “competition” in New Hampshire and it was a flop here as well.
    Since I am currently on every insurance plan in NH and provide the same care to all of my patients, I don’t see how I can compete against myself or how this would work.
    CRC says- Don’t you think you’d be better off if dozens of health care insurance companies were allowed to offer a variety of plans to fit the desires and budgets of Alabamians? Answer, NO. No one knows what medical illness will strike them and when. I had a perfectly healthy patient come in for a physical. He had a diastolic murmur, ECHO showed an aortic tear, which was fixed but it got complicated and he had a bill for over a MILLION DOLLARS.
    Everyone needs the same health care and should get it from one source with a fixed cost as a % of their income. Scrambling around to get the best price adds tremendously to the administrative waste that drives up the cost of care.

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