> “What we’re learning from the hospital data is that insurers are really bad at negotiating”
Do the insurers have any incentive to negotiate well? Since their customers are not very price-sensitive (since they aren't marketing directly to patients or doctors), I would imagine they don't have a huge incentive to do anything but apply a markup to whatever prices the hospital tells them it costs.
Insurers are incentivized to pay higher prices for claims. The Affordable Care Act enforced that insurance companies must have at least an 80% "medical loss ratio." Meaning that insurance companies must make at least 80% of their total spend on actually paying out medical claims. This law was put into place because insurance companies would spend huge amounts of money on advertising and giving execs bonuses, all paid for by patient premiums. Some only paid out 50% of their spend on medical claims.
The Affordable Care Act introduced the newer perverse incentive of insurance companies tolerating higher prices. Because if you can only pay your execs bonuses based on 20% of your total spend, insurance companies can pay execs more if the underlying claims they're paying cost more. 20% of a $1,000 MRI isn't as juicy to your C levels as 20% of a $10,000 MRI.
All insurance companies, all of them are corrupt. The whole system needs to be burnt down. PPOs are the worst, I wish HMOs were the norm, but that won't fix everything.
>The Affordable Care Act introduced the newer perverse incentive of insurance companies tolerating higher prices. Because if you can only pay your execs bonuses based on 20% of your total spend, insurance companies can pay execs more if the underlying claims they're paying cost more. 20% of a $1,000 MRI isn't as juicy to your C levels as 20% of a $10,000 MRI.
If this perverse incentive were true, then you would expect the medical care costs to rapidly increase after the passage of ACA, but medical trend has actually slowed down since then[0] [1].
You can also look at the total dollar spend on hospital and medical expenses for the entire health insurance industry [2]. After the passage of ACA, there was a large increase in medical spend as more people obtained insurance coverage, but the increase in medical expenses year over year has settled back into the 5% range, which doesn't seem that perverse.
Having no idea what the real trend is, couldn't any other factors counteract the perverse effect, making both parent's and your observations true at the same time ?
For instance rhe sustained efforts that lead to ACA peobably didn't stop there, and more effort surely were made to reduce healthcare cost from there. If ACA could be passed in the first place, it wouldn't be surprising if other effective actions were also passed as well ?
>Having no idea what the real trend is, couldn't any other factors counteract the perverse effect, making both parent's and your observations true at the same time ?
Absolutely. There could be other factors that are counteracting the effect, including those within the ACA itself since the bill contains many changes to healthcare, not just the restriction on medical loss ratios.
From your second link, except in the last year, healthcare spend has been outpacing inflation by more than 2 to 1. The economics of scale are backwards in healthcare, I find that perverse.
I think we can agree that something will need to change as medical trend cannot outpace inflation forever. I don't think the issue is with executive compensation, because even if insurance companies magically could perform all their services for free, you would only reduce premiums by less than 20%.
Competition is scarce. Hospitals and providers don't take all insurances, based on backroom shady deals. Depending on location, there often isn't much choice for insurers. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1450072/
Insurance policies have dozens of knobs they can turn to charge your more while claiming it's a lower price. Premiums, copays, coinsurance, deductibles, out of pocket maximums, in network benefits, out of network benefits, and all of that for individual vs family. It's all a scam.
Well, if they can negotiate a particular incident down then they pay less for it, but in the long run big picture you're exactly right. So long as they can inject noise into the plan shopping channel and so long as they aren't doing worse than their competitors by that noise margin, they'll do fine. Which in practice means that they just pass along the costs.
Not really? I'm pretty sure the vast majority of health insurance customers are part of group plans from their employer and so the individual customers have very little influence or choice in the matter, and basically just have to put up with whatever bullshit the insurance companies throw at them since the alternative is seeking individual coverage separate from their employer and paying double or even triple in premiums alone.
Exactly. Employers, especially large ones, have big sway over insurance companies. They can change their benefits and shift a lot of business to a competitor. It’s happened at several places I’ve worked. Definitely a hassle for employees but a save employers a lot.
There’s no universal %margin on turnover that applies across all sectors that tells you whether a market is efficient or not. If I supply you widgets for $1000/ea and take a $50 management fee that we assume is fair for the work involved, then if there’s a shortage of widget materials that pushes the price up to $10000/ea, it’s no extra work for me so the fair management fee is still $50. If I charge $500 to keep the % the same I’m adding no extra value for that extra $450.
Building contractors are an example of an industry that runs on razor thin profit margins in % turnover terms, because all they’re doing is passing on the cost of labour and materials from their suppliers and subcontractors onto their clients and just making their profit adding value in a thin management layer. Which sounds a lot more analogous to insurers than industries that earn 5% profit on their turnover.
There are legions of people working at UHC/Anthen/CVS/Cigna/Humana/Molina/Centene trying to price insurance as competitively as possible to win as much business as possible. If they could price it lower and win more business, it is safe to assume they would be.
If they could price it higher, then why would they choose to only earn low single digit profit margins?
You have 7 huge publicly traded companies competing with each other, and unless there is proof of collusion, it is probably safe to conclude that they are running their businesses as well as they could be.
If you think otherwise, then you have discovered an arbitrage opportunity, which would be worth quite a bit so you should be able to pitch it to someone who wants to invest.
The accusation here isn't that they are skimming a disproportionate amount, it's that they aren't doing their job, which is to put downwards pressure on provider prices.
The fact that there are at least 5 large insurers competing nationwide and all have 5% or less profit margins means there is lots of competition, and if they are not providing the best prices, their customers will go elsewhere.
See pharmacy forums as an example for all the pharmacists complaining about how independent pharmacies are so tough to operate due to ever smaller payments from insurance companies for the past 10 years.
> if they are not providing the best prices, their customers will go elsewhere
Nope. Not if they can inject enough noise into the comparison process to hide the differences. There's a reason they threw so much money at getting bronze/silver/gold standards killed. They knew it was critical to avoid being squeezed.
> pharmacists complaining
Pharmacists are a tiny part of the bloat picture and it's always easier to put the screws to smaller players. Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, or stop growing 10% y/y (on top of regular inflation) and then I'll believe that insurance companies are doing their negotiating job.
> Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, and then I'll believe that insurance companies are doing their negotiating job.
> Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, and then I'll believe that insurance companies are doing their negotiating job.
How are they supposed to negotiate if there is only 1 hospital in an area or a drug company owns the patent to a drug so they are the only seller? The insurance company is mandated to cover emergency care at the hospital and pay whatever price for the medicine if it has sufficient efficacy data, per the laws.
When there are generic drugs available, insurance does pay less for those drugs.
I could be wrong or I could be remembering that they were effectively killed by inserting a key loophole. I'll have to dig up my notes and probably do some research to figure that out.
My point about performance -- 2x, 10%y/y -- stands.
There is no point to comparing US expenses to other countries where drug manufacturers and hospitals and doctors are not allowed to negotiate, and have to accept what the government gives them.
What would you do if you were the insurer and there was one hospital in an area or 1 patented medicine and the government forced you to cover it?
No, it means that Obamacare is working as written[1]. Insurer profit margins are set to the legally permitted ((medical bills) * 15%) - operating costs.
If insurers want to make more money, they can either make medical bills more expensive, or reduce their own operating costs. Reducing the cost of medical bills does not increase the amount of money they make, unless it means they are capturing market share from a competitor.
The problem is that it's nearly-impossible to capture market share. Which insurer do I have? The one that work provides. Did I have any choice in it? No. Did I choose my workplace based on the insurer bundled with it? No. Will my workplace ever switch their insurer provider of choice? Almost certainly 'no'.
How do you capture market share, when all of your customers, and all of your competitors' customers are captives?
[1] Whether or not it was written well is another question.
> It is a huge expense, so why would we not shop around?
Because switching to a different provider can be a huge pain in the ass to your employees, whose multi-year treatments/doctors/etc may suddenly become out of network?
And it's probably not worth doing unless the cost delta is truly staggering?
I agree with many of your points. But in terms of employers switching plans, I've experienced such changes several times as an employee of different companies. It's not particularly inconvenient to a business to switch insurers, though it certainly can be to the employees.
I would like to understand better your definition of "competing" because accidental cartels happen all the time in highly regulated and captured markets such as healthcare.
Nobody chooses to earns a 5% profit margin if they can earn 6%. Low single digits is objectively a low profit margin, for any business, and so must indicate that competitors exist Who prevent charging higher prices to increase the profit margins.
In the US, isn't there regulations that effectively cap their profit margins? Since they have no incentive to increase their margin through negotiation, their only incentive would be to lower their costs below competition.
This would be true if there were a reasonable amount of market understanding by customers and the friction to switching were low. Neither are the case. Most of the time, it takes a qualifying life event or open enrollment (once a year) to switch. And then, understanding the trade offs between plans, which are difficult to understand on a good day, is another barrier.
Then why are insurance company profit margins so low? Why wouldn’t they just jack up premiums irrelevant to their competitors and ignore negotiating pricing and see increasing margins?
Low profit margins/multiple sellers indicates a highly competitive field, which means the businesses must be doing something stay in business.
Yeah, but "something" could be advertising, kickbacks, cherry picking, lemon dropping, making comparison difficult, selectively optimizing visible metrics while balancing with dirtbag fine print, etc etc.
Then the competition who does not do that crap would offer lower premiums and steal business. Just like any other business that wasted money cannot compete with a business that does not waste money.
And this is only true in a markets that are easy to enter. Starting an insurance company isn’t easy.
Why are profit margins only 5%? Could be many reasons, including collusion. Insurance companies have teams of lawyers whose job it is to navigate existing regulation, lobby for new ones and to push for ones that hurt competition.
Given how shady and complex the entire industry is, we don’t really have a reason to believe that 5% is an accurate number.
Stating that SEC filings for an entire industry are fraudulent across 7+ large companies with tens of thousands of employees each is a pretty serious accusation that I cannot entertain without proof. The other option is I stop trusting in the whole system.
Do the insurers have any incentive to negotiate well? Since their customers are not very price-sensitive (since they aren't marketing directly to patients or doctors), I would imagine they don't have a huge incentive to do anything but apply a markup to whatever prices the hospital tells them it costs.