Topic: Health Care
Oregon Experiences Double Digit Health Insurance Rate Increases. What is revealing is not the rate increases themselves, but the reasons given.by Gene DeNardo
(libertarian)
Wednesday, September 9, 2009
Oregon, like many states, is facing double digit increases in health insurance costs this year. The glaring abnormality however, is not the increases themselves, but the reasons given for the inflation. From the explanations it is fairly obvious that competition and the free market are not "alive and well" in the medical insurance industry.
The increases ranged from 10% that would affect the almost 9,000 Oregonians under the auspices of Kaiser individual health plans to Health Net's 23% increase in individual rates. The small group rates also increased in double digit amounts with ODS's 24% increase affecting over 13,000 clients, being the largest. Small group plans have doubled in cost over the last nine years. [link edited for length]
The State of Oregon can directly claim 1% of this increase. There is a new 1% tax on premiums that will be used to cover 80,000 uninsured Oregon children. This is being passed on to consumers.
What are extremely enlightening are the "other" reasons given for the double digit increases. One reason is "higher costs". Now, we seem to take for granted inflation in the health care industry. Yet, the overall economy has experienced some serious deflation. Although hard to accurately measure, many economists believe we have experienced deflation that hasn't been rivaled since the Great Depression. Others are more cautious, but it is fairly obvious that we have had some decrease in costs and in many sectors, such as housing, it has been across the board.
What is blatantly obvious is that we haven't had any double digit increases in prices in any sector, since the downturn established itself. And, this is with the Federal Government pouring trillions into the economy. So, it would be fair to say that if the health industry is experiencing costs that justify double digit insurance premium increases, then something is at work that we can't rightly consider "market principles".
But, that is not the most confounding health market anomaly. The fundamental reason given for the price increases is that due to the recession, fewer Oregonians are now insured. It is estimated that 150,000 to 200,000 out of the state's population of 3.7 million have dropped their insurance. This was just glazed over in the article linked above, but this is a revelation in terms of market analysis.
In the workings of a marketplace, insurance functions on some very basic principles. The fundamental one is the law of "supply and demand". This governs all aspects of the free market. Demand always determines supply. Or, at least we can say, there is no market need for supply, if there is no demand for it. And the supply of a product in relation to its demand determines price. Increasing demand raises price, unless supply is increased while decreasing demand will lower price unless supply is lowered.
But in this case, we have insurers themselves claiming that the reasoning behind the increase in price or premiums is due to less demand for their product. Less people are purchasing health insurance, so the insurers are raising prices! And not one or two, but all insurers in the state of Oregon are raising their prices at double digit rates in order to compensate for "slackening" demand.
Is it possible that Adam Smith, Ricardo, every great economic mind including all the Austrian School theorists are wrong? Could it possibly be that decreasing demand actually drives price up? How could they have missed this simple concept?
Less people purchasing health insurance "lowers" the costs of the insurer. Although the insurers have lost the income from the premiums of those who have dropped their policies, they have also lost the cost of care and possibility of "catastrophic" occurrence and risk that each client poses. There should be no great change in calculation and overall cost other than the loss of profit on those who quit their policy. The decreased demand should spur companies to become more competitive and try to win back these customers by lowering premiums, in order to gain market share in relation to other firms. That is, if they are actually competing. In any case, less demand is never a reason to raise prices, unless you want even less demand and eventual liquidation!
Regence Blue Cross Blue Shield and Providence Health and Services together control 52% of the Oregon health insurance market. [link edited for length] Although, that leaves 48% of the market share up for grabs, it doesn't appear to be sufficient to spur real competition. If there was even a glimmer of competition within the industry, some firm would at least hold prices and easily gain a substantial chunk of market share.
Public relations representatives of the industry have repeatedly claimed low profit margins, [link edited for length] yet insurers have posted record profits. [link edited for length] In neighboring Washington State, the big three, Regence Blue Shield, Premera Blue Cross and Group Health Cooperative saw their profits increase from 11 million in 2002 to 431 million in 2006. Their cash surplus increased nearly threefold in the same time period, to 2.2 billion.
Another simple free market principle is the limitations of profit. When profits in an industry are high, firms will flock to the industry to cash in, which has a moderating effect on margin. What we are witnessing is one or a few firms controlling the majority of the market share in all regions while profits skyrocket.
Also, in correlation with the Oregon phenomenon, the Washington big three insured 1.9 million people in 2006, down from 2.3 million in 2002. Apparently, in the health insurance industry, insuring less people creates more profit and allows higher prices. It appears we will need to correct all the economic textbooks. The law of supply and demand definitely has some exceptions!
Whatever the reasons, it is obvious our health industry is not free market and is not even bordering on competitiveness. Even in the clench of a recession we have a gross domestic product that dwarfs other nations, yet we spend close to one out of five dollars on health care.
And, what do we get? Sixty percent of the individual bankruptcy cases are rooted in health care costs. Many American employers and employees can barely afford their premiums. Many can't afford them at all. And, the concept itself of providing insurance for basic health care costs, analogous to insuring your house for minor repairs, sticks with us. Health Insurance often fails to provide for catastrophic occurrence, as is obvious in the bankruptcy statistics, but persists in covering half our population when they have a tummy ache. This isn't a "market failure", but a complete lack of any true market principles.
When monopoly or cartelization occurs, the industry that is successful in imposing its will no longer has its costs contained by competitive factors. Normally, costs can still be somewhat contained by individual preferences. When the cost of a good or service is overpriced due to the absence or collusive removal of competition, people can choose not to purchase or to purchase less. In this manner, even the monopoly or cartel must weigh the volume of their product they wish to sell in relation to the price the wish to impose. The lower the price, the more product that is affordable.
Obviously, in any dire situation we are somewhat limited in our ability to choose less health care. Most will choose life at any cost if it came to that. This only emphasizes the market need for catastrophic health insurance. If insurance cannot provide security to people in life threatening situations, then what exactly is it for?
The health insurance system that is in place at present was not created out of the market and does not respond to market forces. Instead, the health insurance industry is the market. They do not look to their fellow firms to come to grips with competitive pricing. They instead decide what price will attain the greatest revenue. They search for the combination of the highest premium factored by the number of clients that will tolerate that premium, standard monopoly behavior. When it has come to the point that they can admit publicly to raising prices in response to losing clients, it is very late in the game.
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Hi Ben, the justice department has rated the health insurance market in every state as "highly concentrated". they know the score but refuse to confront the problem.
While I agree the lack of competition is troubling... your conclusion that "fewer customers" is not a reason to raise premiums is premature. I can easily think of a likely cause:
In tough economic times, people who are sick or expect to be sick hold on to their health insurance because they expect to use it. People who are healthy figure they can do without and drop it. In consequence, the pool of insured tends toward sicker individuals... and the cost per person goes up.
Now, this does not absolve insurance companies... but no reason to blame them unnecessarily.
I insure in Oregon under a Providence individual plan, and I agree there are major problems with the marketplace. I think there are several key reasons:
- Few competitors and collusion, as you point out above.
- The nature of healthcare as a non-commodity... people make decisions about their health very differently... few "comparison-shop", or question what procedures are needed. Insurance is actually part of the problem... by removing a large part of the financial cost of procedures, they align the two main decision makers, doctors/hospitals and their patients, towards doing more procedures and tests... doctors and hospitals to profit, and patients to get better.
- Health insurance, unlike other functioning markets, is not something a person should just not buy. The companies essentially have captive customers who must buy their products. (obviously, people do go without health insurance... but that's simply because they can't afford it... so it's even hard to count that as a customer lost.)
I think it is fundamentally hard to have a functioning healthcare market where the decision makers do not have an incentive to save money, where the costs of care are usually obscure prior to receiving the services, where people are willing to spend whatever it takes to stay alive. How often do you shop around for health insurance.
If we have any hope for an efficient healthcare market, we need fundamental changes in how services are priced and advertised, greater competition, and institutions which help people make rational health and financial decisions when they are least capable of doing so.
I agree with all your comments except for the first. When a person is sick, they will do whatever they can to hold onto their insurance, but if they absolutely can't afford their premium, then there isn't much they can do about it. So while a greater percentage of healthy people have the "luxury" of being able to drop their insurance without immediate consequences, not all "sick" people are able to hold onto their insurance in tough times.
The other aspect is the profit figures, which have been astronomically high for a decade in the health insurance industry. Would not the increase in rates allow a couple of providers to "undercut" their competitors and gain market share without experiencing losses due to large profits enjoyed by the entire industry? such is not the case.
I pretty much concur with the remainder of your ideas.
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