Increased competition will hold down premiums…eh, not so much

Conventional wisdom and President Obama holds that more competition is good.  Hardly a day goes by that the President is not talking about increasing competition to hold down health insurance premiums. The new insurance exchanges within the health care reform legislation are intended to increase competition, Americans need more choice we are told.  This all sounds reasonable except when you understand how the health care system works.

If you go to a doctor or hospital without health insurance, you will receive a bill for the full cost of services.  That amount has no resemblance to the amount paid for the same service by a health insurer.  In fact, it is an inflated charge. That is because each insurance company, employer self-funded plan and the federal government negotiate discounted fees.

In order to obtain the lowest fees, the insurance company must be in a position to bring a substantial number of patients to the hospital or the doctor.  In large measure, these are volume discounts. The insurance company brings those patients from its enrolled members.

Think of it this way, Wal-Mart sell products for much less than the local retailer because Wal-Mart is so large nationwide and has such a large portion of the market share it is in a position to virtually dictate to vendors what it will pay.

Consider a state where the local Blue Cross-Shield Plan has 80% of the market.  To hear the President and his allies tell it, more competing insurance companies in this state will bring competition and lower premiums.  Not exactly, because if the patients in the state are now dispersed among a half dozen insurance companies each of those companies must negotiate health care provider fees. Now rather than the single Blue Cross plan bringing nearly all the patients to the providers they are split among six companies and none has the same market power to obtain the highest discounts possible.  This means that the premium for all the insurers will likely be higher than the when there was less competition.

To put it simply the President’s message about competition in the health insurance market is wrong.

What is also wrong is the entire process of discounted fees.  It distorts the true costs, and shifts costs to self-payers and insurers with a small presence in a given market. No one knows what the fair cost of health care is because of this distortion. To obtain the benefits of competition, there should be no discounts possible.  That accomplishes several things, insurers and plan administrators must compete on the efficiency of their operations, the true cost of health care becomes more apparent, all payers are treated fairly and more pressure is created on health care provider fees.  Eventually, this will create competition for patients among health care providers (assuming that health plans retain reasonable cost sharing provisions in their plans). 

There is nothing in pending health care reform legislation that addresses this issue or the many other issues affecting the fundamental structure of the health care system in America.  Therefore, the possibility of this reform effort affecting the escalation in health care costs is non-existent.