Why hasn't competition between health insurance providers led to lower prices for consumers?

Question

In the US, a common argument I've seen against a universal healthcare system is that removing the ability of private health insurance companies to compete will give rise to a natural monopoly in the industry, leading to an overall increased cost to the taxpayer.

This argument seems to assume that competition between health insurance providers is currently benefiting consumers by lowering the price of premiums & deductibles, however this study by the KFF found that the average annual premiums for employer sponsored health insurance rose by 4-5% in 2019, more than both wages (3.4%) (based on the change in total average hourly earnings of production and nonsupervisory employees) and inflation (2%).

Why isn't competition between health insurance providers lowering the cost of premiums? Are there other factors at play? How do existing nationalized healthcare systems seek to mitigate this issue?

Answer 1

What the other answers fail to address is a fundamental flaw in capitalism for certain types of business:

Your average human places their continued survival above all other priorities.

This concept is called 'inelastic demand'. In order for supply and demand to work properly, both entities need to be free to disengage and seek other options. But when one's life and/or well-being are at immediate risk, fear of death and/or disability clouds our judgment towards rational analysis of our situation, and thus puts healthcare providers in a position of power over us. Likewise, the fear of future death and/or disability versus financial ruin or loss of coverage can put health insurance companies in a position of power over us.

So while I might shop around for a good car and allow my current car to become less-than-ideal while I wait for a good opportunity, I will not gamble with my life or the life of my family, and thus if I only have two options for healthcare, I will invariably pick one of those two rather than wait for something better to come along.

Answer 2

How free is the US health care market really?

The reason that free competition has not made health care in the US cheaper is that free competition has in fact been severely restricted for decades. As described in this article, regulation of the health care industry has been continuously expanded (decreasing the supply of drugs, doctors, etc.), while subsidies have been raised (increasing demand). The article provides the following list of legislation historically passed by both parties that has interfered with the competitive landscape:

• In 1910, the physician oligopoly was started during the Republican administration of William Taft after the American Medical Association lobbied the states to strengthen the regulation of medical licensure and allow their state AMA offices to oversee the closure or merger of nearly half of medical schools and also the reduction of class sizes. The states have been subsidizing the education of the number of doctors recommended by the AMA.
• In 1925, prescription drug monopolies begun after the federal government led by Republican President Calvin Coolidge started allowing the patenting of drugs. (Drug monopolies have also been promoted by government research and development subsidies targeted to favored pharmaceutical companies.)
• In 1945, buyer monopolization begun after the McCarran-Ferguson Act led by the Roosevelt Administration exempted the business of medical insurance from most federal regulation, including antitrust laws. (States have also more recently contributed to the monopolization by requiring health care plans to meet standards for coverage.)
• In 1946, institutional provider monopolization begun after favored hospitals received federal subsidies (matching grants and loans) provided under the Hospital Survey and Construction Act passed during the Truman Administration. (States have also been exempting non-profit hospitals from antitrust laws.)
• In 1951, employers started to become the dominant third-party insurance buyer during the Truman Administration after the Internal Revenue Service declared group premiums tax-deductible.
• In 1965, nationalization was started with a government buyer monopoly after the Johnson Administration led passage of Medicare and Medicaid which provided health insurance for the elderly and poor, respectively.
• In 1972, institutional provider monopolization was strengthened after the Nixon Administration started restricting the supply of hospitals by requiring federal certificate-of-need for the construction of medical facilities.
• In 1974, buyer monopolization was strengthened during the Nixon Administration after the Employee Retirement Income Security Act exempted employee health benefit plans offered by large employers (e.g., HMOs) from state regulations and lawsuits (e.g., brought by people denied coverage).
• In 1984, prescription drug monopolies were strengthened during the Reagan Administration after the Drug Price Competition and Patent Term Restoration Act permitted the extension of patents beyond 20 years. (The government has also allowed pharmaceuticals companies to bribe physicians to prescribe more expensive drugs.)
• In 2003, prescription drug monopolies were strengthened during the Bush Administration after the Medicare Prescription Drug, Improvement, and Modernization Act provided subsidies to the elderly for drugs.
• In 2014, nationalization will be strengthened after the Patient Protection and Affordable Care Act of 2010 (“Obamacare”) provided mandates, subsidies and insurance exchanges, and the expansion of Medicaid.

In dollars and cents, the US public sector has for decades spent several 100 billions of tax dollar every year on providing health care. Any claim made about competition and the US health care system must be seen in light of this fact (image source on Wikipedia).

Moreover, unlike medical procedures supplied by the politically controlled and subsidized system, the cost of laser eye-surgery and cosmetic surgeries (both of which are not subject to the same regulatory burdens) has steadily been declining while the quality has increased (source).

A real world example of a health care system run under something closer to free market conditions is Switzerland's. Insurance is practically completely privatized (though purchasing one is mandated by law), and recipients of tax-funded public health support are expected to pay back the funds later. As a result, costs are relatively low, while quality and accessibility is high (source).

On a related note, it is common for people (particularly in the case of Europeans) to overestimate how laissez-faire the US really is. Anyone who compares their level of public spending to GDP (+30% the past 50 years) or anyone who has tried to read the byzantine federal tax code can confirm that its economy is less free than public discourse might lead one to believe.

Answer 3

I place the blame on the fees charged by drug makers, doctors, nurses, and hospitals. The market for healthcare does not have the "supply and demand" dynamic. Patients just have to "pay-up".

After a cycling accident fractured my clavicle, I didn't call 3 or 4 EMT services for price quotes. Someone else had to dial 911, the EMTs took me away to the ER without any discussion of cost. Just 4 blocks to the ER, yet my EMT bill alone was $1,800. The ER bill was an additional $2,000. I refused a CT scan, but they would not discharge me unless I had a CT. Exhausted I relented, and the CT was a waste and radically raised the price of my health care. One moment, I was riding my bike trying to be a healthy person, then US healthcare charged me $3,800 for a 4 block ride to the hospital. There's no treatment for broken clavicles. And, I didn't bother purchasing pain medication (luckily the break didn't hurt too bad and pain meds don't really work on me for some reason).

A family member, to stay alive a little longer, must purchase a prescription drug. The drug company can charges what they think maximizes profits, not what saves the most lives.

Summary: the excessive cost of US healthcare is caused by a lack of "supply and demand" dynamic for non-optional medical treatments. And, probably 98% of all medical treatment is non-optional. A patient just has to "pay-up" and hospital / doctors / drug companies can charge anything they want.

Answer 4

I think you're looking at this the wrong way.

Many factors impact prices. Competition doesn't necessarily mean that prices will be lower year-over-year. Competition means that prices will be lower than they would be if there was no competition. If prices went up by 5% but they would have gone up by 8% in a non-competitive environment, then competition did in fact reduce prices. The overall price increase just means that there are other factors that happened to have a larger influence.

For health insurance in particular, competition definitely does lower prices this way (although not always as much as we'd like it to). The insurance company that my company uses was trying to raise rates far more than we anticipated. Competition meant we could shop around and found several other companies that bid similar plans at lower rates. We ended up staying with the same company, but only after they agreed to match their competitor's rates. Our premiums still went up, but by a much lesser degree. In a non-competitive environment, we would have had to suck it up and pay the higher price.

Answer 5

In my experience, when the affordable care act came out the first year there were quite a few choices in my city so you could shop and compare. By the second year there were fewer choices and then I moved from northern VA to central VA, just 80 miles away and my insurance didn't work anymore and now there were less choices and completely different.

What I can gather from this is that:

1. Health insurance companies target specific regions, even down to the city/county (just like cable companies do) to maintain a monopoly. There may be some deals going on there.

2. Health insurance companies buy each other/merge so I have received letters like Aetna is now part of Cigna or Vice versa or Anthem so they give you an illusion of choice when really a big corporation manages different brands to control prices (just like glasses or mattress conglomerates do)

Some references:

Obamacare shoppers find fewer insurer choices on exchanges

Top 5 Healthcare Mergers of 2018

The Conspiracy Behind Your Glasses (YouTube)

Answer 6

Because that's not how insurance works

Insurance is about risk management. When private companies enter this arena, their number one goal is to make a profit. They have to figure out how much a person should pay over time, estimate how much they'll have to pay out, and still come out with a profit margin.

It's all probabilities. If you're paying $200 a month, but only have $700 in expenses, the company makes $1700 off of you that year.

Here's the important bit: Your risk factors don't change when you switch companies. Sure their estimation formulae might differ, but ultimately, you will always represent the same amount of risk. This, in conjunction with the number of other people the company is insuring, is the biggest factor in determining the policy premium (all other things being held equal, i.e, for identical policies).

But if the government does it, they're not out to make a profit. They're out to break even over the entire population of their nation. In the US, you may have tens of thousands of people who rack up huge bills. It's outweighed by the tens of millions of healthy people who will be paying more than they spend. That's how it's (supposed to be) cheaper.

Answer 7

removing the ability of private health insurance companies to compete will give rise to a natural monopoly in the industry, leading to an overall increased cost to the taxpayer.

Emphasis mine - and this is where the free-market assumption is utterly wrong.

Private health insurance, private hospitals, and private everything has one focus in mind. Return on investment. Not whether you get better. Not whether your treatment is effective. Not whether your treatment is cost-effective. Solely whether the organisation can turn a profit. This is the focus of every individual in that organisation, from the CEO to the cleaners. In a private system, your doctor does not care about you - they care about the money they can make from you. I'm not saying that everyone working in private medicine are inherently bad people. But I am saying their job does not allow them to be a good person at work.

So the most important thing in treating a patient is how to make the biggest profit from that patient. If we assume the cost of treatment is identical (and that in itself is a bad assumption; the UK's NHS pays an order of magnitude less for the same drugs compared to US hospitals), then the only way to increase your profit is to charge more for treatment.

If there was a way to shop around for treatment, then costs would certainly come down through competition. This is actually true for many elective procedures such as plastic surgery, hip replacements, and other non-emergency procedures.

But when it comes to an emergency, there is no competition. The ambulance picks you up from your car crash, unconscious, and takes you to the nearest hospital. You can't shop around. And you don't even know how much you owe until you recover from surgery.

So there is already a "natural monopoly" for emergency medical care, and the monopolists are maximising their return on their monopoly to the profound detriment of their customers/victims. And as with any other de-facto monopoly, the only way to control this exploitation is either with regulation or with nationalisation in the public interest. In every other monopoly situation in the past, this has resulted in lower costs to the consumer.

Which leads on to your actual question...

Why isn't competition between health insurance providers lowering the cost of premiums?

When the private healthcare providers can essentially charge what they like as monopolists, those costs are borne by the patient. If the patient has health insurance, then those costs are passed on to the insurer (less any co-pay amount, of course).

The insurer is therefore just as much a victim of the monopoly as the patient. They have no ability to limit how much a healthcare provider can charge. In order to pay these inflated costs, the only thing an insurer can do is raise premiums for all their customers.

A healthcare provider will charge the same amount per procedure to everyone - and since insurers will all have a similar customer base, they will all have to deal with similar costs from providers. So it follows that insurers will all have to charge very similar premiums, because they are all paying the same inflated costs to monopoly healthcare providers. If the healthcare provider puts up their costs, every insurer has to raise their prices correspondingly. This eliminates the possibility of competition between insurers, because the insurers themselves have no ability to affect costs.

The only possible source of competition amongst insurers would be to screen patients on application. Patients assessed as lower risk could be given lower premiums, because on average they will not have such high healthcare costs; and vice versa, higher risk patients would have higher premiums; and if an event occurs (such as a cancer diagnosis) which would increase risk then the next premium would be increased. This is widely seen as an unfair system, because it penalises people for factors (such as cancer) beyond their control. It is therefore illegal in some places.

Answer 8

Let me answer the question at the end, which is really simple.

How do existing nationalized healthcare systems seek to mitigate this issue?

In most countries where healthcare is universal and free-to consumer (i.e. they don't specifically make payments for individual treatments) the funding comes from mandatory contributions, usually levied on employers and employees. These are collected in the same way as taxes. The contributions are usually proportional to income, possibly with a maximum. (There are other approaches but we will consider this one for now).

Technically the government is a monopoly and could set any rate they want for contributions, but the reality is that they don't, because they will be voted out if they raise these charges, just like they will be voted out if they raise taxes too much.

Healthcare costs of a government run scheme are lower for a number of reasons:

1. Lower administration costs (Most government run healthcare spends <5% on Administration. US private healthcare providers spend 25-30%)
2. No profits A good chunk of US healthcare costs just go to pay shareholders
3. Better prices due to better negotiating power. Healthcare providers on a national or provincial level can negotiate much better deals with suppliers than individual healthcare companies.

TLDR: Healthcare costs won't be raised uncontrollably for the same reason taxes aren't raised uncontrollably.

Answer 9

Maybe I read too fast, but I didn’t see this. After working ten years for a large non-profit health care system, much of that in the financial department, it is my unproven opinion that part of it is because the insurance companies make contracts with doctors to accept certain amounts, and there’s a limit to how low a doctor will go before refusing the offer. The patient has to either go to a doctor that accepted his insurer’s price or pay a lot more. And most have to accept the insurer their employer subsidizes or pay a huge amount more. And if we accept Medicare, there is no negotiation there—we’re required to accept Medicare’s unrealistic decision, which is usually below our cost. Which means we have to get more than cost from commercials to break even.

Answer 10

The premiums are there to cover the cost of drugs, hospital prescription drugs, reagents and lab testing compounds, and hospital machinery, mainly.

US pharma companies invest a great amount of their funds into stock buyback, purchasing their own shares to satisfy investors and pay corporate exec bonuses.

https://www.ineteconomics.org/perspectives/blog/we-stopped-pfizers-tax-dodge-now-lets-end-the-buybacks

Pfizer alone in a 4 year period paid 80 billion in stock buyback and dividends. This 80 billion came from where? Quote : "Yet from 2011 through 2015, Pfizer spent an equivalent of 71% of its profits on buybacks while also distributing 52% of its profits as dividends"

This racket allows the company to grow, while keeping prices high, and because investors like the whole arrangement insurance companies can continue to keep charging exorbitant amounts to US citizens to preserve the status quo.

It is essentially Wall Street fleecing the everyman, while lobbyists run around shouting "deregulation" and "free market" to make sure this racket isn't obstructed by sensible, humane legislation.

In technical summary, the US healthcare system is a feedback loop where profits are reinvested into their own share price, to attract further investment, raise prices even further and consolidate the oligopoly even further. Insurance premium prices are secondary to that, driven by those costs.

Answer 11

Because health insurance is intentionally designed to subvert market forces.

Competition of the sort that tends to lower prices requires meaningful consumer choices and accurate consumer knowledge. Health insurance subverts choice by coercing consumers into group policies tied to their employment, and restricting which providers the consumer can use and how often they can change policies and providers. And it subverts knowledge by obfuscating how much the consumer is really paying (through employer matched contributions) and what services they're actually paying for. Insurance also subverts the incentive for providers to compete on price, replacing it with a perverse incentive to bill insurance for the maximum allowed. It is primarily this perverse incentive, not the private insurance industry's profits, that drives up health care costs. Therefore, replacing private insurance with government managed programs like Medicare will not help control costs.

Compare the corrupting influence of health insurance to the way society has addressed another universal need: food. The SNAP program (a.k.a. food stamps) does not corrupt the market for food because recipients are not restricted in where they can shop and only minimally restricted in what products they can buy. Crucially, SNAP benefits are only received by the poorest segment of the population, and SNAP recipients pay the same price as everyone else for the same products. Imagine what would happen if grocery stores were allowed to charge a different "food stamp price" for a loaf of bread.

Insurance makes sense only where natural market failures prevent a market from existing. For example, there can be no market for emergency care for the simple reason that people don't shop around when they're bleeding out. But for preventative care, the competitive market that would otherwise exist is fundamentally incompatible with insurance. "Affordable Care" requires making health insurance illegal, not mandatory, and creating a SNAP-like program to ensure that everyone has access to basic preventative care at the market price.

Answer 12

The most logical thing is supply and demand.

Healthcare has a high demand due to it being pretty much mandatory due to the consequences of nothing it being disastrous. This is contrary to many other products/services on the market. (there is for example no downside to not going to a movie theater or not buying a new tv)

A practical example that I experienced was when I had to drive my mother to the dentist on a Saturday evening after her tooth broke and she was in horrible pain. We got charged nearly 200 euros for the treatment while during regular hours it would have been close to half price. But we had no choice other than to accept because he was the only one in the region working at that time and she was in horrible pain.

And that's the situation for healthcare in general...you can't avoid it and they know it. So without the risk of pricing themselves out of existence they only need to worry about competition. And with so few competitors they are able to make arrangements which is not uncommon in other fields as well.

A small scale example I once read about were construction companies who kept the prices high based on a mutual agreement, but each one of the companies had a claim on a certain area where they were allowed to go below the others on the price. This way each one was ensured to their own client base and were able to keep the prices high.

But even without such agreements, if you know your product HAS to be bought you won't undercut your competitor by more then 1% because why would you? People often prefer to stay where they are and think in the short term cost/hassle switching would bring them. It's not like you can walk into a store, grab a bag of health insurance for 5 bucks and walk out and be done.

Answer 13

Some parts that has not been mentioned yet.

Part of the evil cycle is that the "price" to become a doctor in the US is much higher than elsewhere.

Then there is the lack of transparency. You cannot get a price for something like a childbirth. (If you can prove it is coordinated it would be illegal)

But I really don't understand why a big employer like Walmart doesn't make their own hospital/school for doctors and outcompete the rest of the market.

Answer 14

Fundamentally, because the insurance companies don't set the prices of medical care. Sure, they can bargain, and often get price reductions, but there are limits to that. Doctors & hospitals need to cover operating costs, drug & medical equipment makers aren't interested in selling below cost, &c.

As for why medical costs (and hence insurance prices) rise faster than inflation, a major factor is the development of new treatments that work better than old ones* (or at least one hopes they do), but cost more.

*If indeed there even was a treatment: consider the cost of developing a vaccine for the current coronavirus.

Answer 15

Two quick things. I think health is going through two transition phases, one is baby boomers are placing huge demands on the sector and also companies are trying to maximise their profits for new drugs and devices while they can. Three hundred years from now drugs and medical equipment will be so commonplace you may have an MRI in your home

Answer 16

I can certainly understand where my own health insurance is concerned because with the passage of the Affordable Care Act (ACA), my health insurance premiums tripled in size the first year it took effect. Yes, there was a subsidy in place to help compensate for my expenses, but it still means that more money entered the health care marketplace courtesy of Uncle Sam. That same effect happened with nearly everyone, including employers.

If supply-and-demand is indeed the primary (but not sole) determinant of pricing (and I believe that's true), then clearly a huge new influx of cash into an industry overall is going to drive nominal prices up for everyone within that industry. After all, supply-and-demand applies to money too, just as it applies to goods and services.

This massive increase in cash spent happened because the ACA mandated a number of new, required coverages that forced everyone to contribute more to the health insurance pie. It also occurred because more people were being covered who hadn't been covered previously.

When you increase the amount of available cash in an industry, prices are likely to keep going up regardless of how much competition there is. Sure, if there is sufficient competition, the marketplace can compensate for the increased cash in the long run, but that can only happen if there is enough profitable opportunity for health insurers to offer savings on insurance premiums. The same ACA also put a lot of restrictions on insurers for the same reasons you inferred in your question, so it's not like there was a whole lot of room left for the effects of competition to accomplish anything helpful.

The problem has only gotten worse since then. Here in Connecticut where I live, we're down to exactly one (1) private health insurance plan option at the Bronze level and two (2) at the silver level, and both are expensive as heck. Even the Bronze plan is approximately four times as expensive as my insurance used to be before the ACA. All of the other health insurance options have been withdrawn from the marketplace by the insurers. Why? Because the combination of higher costs and legal restrictions on what they charge has driven them from the marketplace. Similar situations are occurring across the country.

https://www.economicshelp.org/blog/111/inflation/money-supply-inflation/ https://www.thebalance.com/cost-of-obamacare-3306050

Answer 17

The price of healthcare has about quintupled since 1970. That's after adjusting for inflation.

We can speculate on why, but the question of the healthcare debate in the United States, maybe the only question, is how to distribute those losses.

And distribute them we must: neither the market nor the electorate (which are really the same thing in the end, the collective action of American citizens) will countenance a drastic reduction in the scope or quality of care to rein this in. The money will get spent, the question is how and where.

Profit margins in healthcare are generally slim, which is why all the healthcare companies are national super-conglomerates: it reduces the risk of failure due to those slim margins. In absolute terms sure they make money by the metric tonne. But it also means that there are limits to what you can squeeze out of that industry in terms of improving efficiency. Because there is no magic bucket to pull money out of.

But boy howdy do people ever want there to be one. Some believe in a magic bucket called "competition" because when the competition engine is firing properly it can be almost magical in generating beneficent outcomes. But there are also well known failure modes for the competitive model. It sure hasn't stopped the price from quintupling.

Some people believe in a magic bucket called "the government" because when the government engine is firing properly like the competition engine it generates outcomes that are almost magical. But all too often people conveniently forget that the government money bucket is actually all of us citizens. When you say you think the government should pay for something, you are in effect saying I think my friends and neighbors should pay for something. And maybe they should, but the rhetoric I hear both in the media and in person sounds more magical bucket-ish.

So in summary to answer your question, competition seems to have already worked in the sense that profit margins in healthcare are slimmer than most industries, which is to say that without competition it would have been even worse than it is. That didn't stop the price from quintupling in real inflation-adjusted dollars, and it's not clear just what more competition remains to be unleashed. And now we have to deal with the fallout of that, which of course no one wants. So they blame "greedy corporations" and "over-reaching regulation" so they don't have to face the fact that it just costs more, and somewhere we're going to have to eat that cost somehow.

Answer 18

The wrong question is being asked. For starters, the term, "Universal health care" is a misnomer and is not what proponents of socialized medicine have in mind. What the OP is really asking about is why a totally government-run healthcare system is inferior to a totally free-market healthcare system.

What you'll find by studying the US healthcare system is that it's a hybrid comprised of public, government-subsidized healthcare (Medicaid, Medicare, VA) and private, free-market healthcare. What drives up the costs of our healthcare are the government-run components. There isn't anything that the government does more efficiently and effectively than what the private sector does. The reason is there are no incentives to make healthcare more efficient and effective when the healthcare recipients and providers have no control over how the system operates. Conversely, in a free-market healthcare system, both the providers and the recipients do have control over how the system operates.

in a free-market healthcare system, recipients can choose to obtain care from among several providers based on their quality of care and the fees charged for it. When providers are competing for the same customers, they have incentives to offer high quality care at affordable prices. In the government-run healthcare system, the government limits access to a very small number of providers that recipients can choose to see. Also, since these providers receive the same amount of money regardless of the service they offer, the quality of care suffers. In other words, as long as someone else is paying for it, there are no built-in incentives to offer better quality care at lower care costs.

The other downside of a fully, government-run healthcare system is the actual costs of providing care compared to the actual rates of reimbursement. Medicaid pays 40 cents for every dollar of healthcare provided regardless of how many people are receiving care. For many healthcare providers, including hospitals and clinics, their operating costs exceed what they are being reimbursed for the services they provide. Their only options to stay in business is to ration care by putting people onto waiting lists and/or denying care to high-risk groups of people (like the elderly).

Even with rationing, hospitals and clinics will close and many doctors and nurses will quit the profession because they cannot earn enough to make ends meet.

The other confounding factor that socialist Democrats are pushing is calling healthcare, "a right" and making it "free" when, in fact, it has to be paid by the majority of taxpayers, namely the Middle Class. But, what does "Healthcare is a right" even mean?

Does it mean that I can go into any hospital, as many times as I want, and demand services that are not medically necessary like getting cosmetic surgery? Also, since they want to offer free healthcare to illegal aliens, that means having even longer lines and waiting times for simple treatments, let alone treatments for serious illnesses.