Why Market Competition Will Not Lower the Cost of Health Insurance

 “Competition drives improvements in efficiency and effectiveness, offering consumers higher quality goods and services at lower cost. It can have the same effect in the health care system, if given the chance to work.”– Mitt Romney

Creating “robust competition” is at the core of Mitt Romney’s approach to Health Care Reform. He would be right–if health care were commodity like any other.  In many industries when more sellers compete for customers, prices come down. Think of thin-screen TVs.  But the healthcare market is not like other markets, as a great many health care economists have explained.

When it comes to medical care, the consumer does not have the leverage that he enjoys in other markets because there is too much uncertainty about a) what he needs, and b) the value of what is, in the end, a very complicated product.

First, consider his needs: Should he purchase an expensive, comprehensive policy with no caps on annual or lifetime payouts? If he has a big family, he knows he needs a big car. But he has no way of knowing whether he, his spouse or one of his children will develop cancer, MS., Alzheimer’s or be in an accident that leaves one of them paralyzed for life. So there is no way that a savvy consumer can bring down insurance prices by shopping for the “least expensive policy that fits his needs.”

Secondly, he has no way of knowing whether the network of hospitals and doctors that an insurer offers is “the best,” because he is not in a position to measure the quality of care.  Even medical researchers will tell you that “outcomes research” is still an infant science. At this point, the ambiguities and complexities of medicine make it extraordinarily difficult to measure quality. For example, we might know that the patient survived the operation. But does this mean that it was a success? Maybe he didn’t need the operation in the first place.

What if, following the operation, he was shipped from the hospital to a nursing home, where he spent the next three years unable to recognize friends or relatives? How do we rate that outcome? What if “complications” –that might or might not have been preventable–left him in such a sorry state? Return to the original question: Did he need the operation in the first place?

In order to measure outcomes, we need to go beyond: “Did the patient live or die?” to ask “Did he receive the right care at the right time? Was the care patient-centered? Did preventable mistakes add to his suffering?  If he died, was he in extreme pain? “

Quite naturally, a layman will simply assume that the most expensive medical care must be the best.  He does not realize that market leverage, rather than quality, determines how much an insurer will pay. He only knows that as a patient he wants the best–whatever the cost.  We spend most of our health care dollars when we are very sick.  So if we can possibly afford it, most of us will pick the most expensive provider.  This will not bring down the price of care.

Providers understand this.  Thus, they rarely attempt to compete on price. No one advertises a 10% discount on hospital stays in August (when 1st year residents begin learning how to practice medicine in the nation’s hospitals.) Instead, hospitals vie for well-insured customers by offering ever more sophisticated, high-tech equipment (which may or may not improve outcomes, because, too often, it hasn’t been fully tested.)

Hospitals’ ad campaigns also promise amenities:  better food, better views and private rooms with two thin-screen TVs so that a vistior can watch “the game” on TV while the patient (or another viistor) watches something else.   These “extras” enhance a hospital’s reputation, even-though they have  nothing to do with infectionon rates, or whether or not surgeons use “checklists” to avoid preventable mistakes

As for doctors, in many cities, those who vie for well-insured patients rent prime real estate in pricey neighborhoods, and spend lavishly furnishing  their waiting rooms.  Patients find this reassuring. They tell each other: “He must be doing very well.” Again, these expenses lead to higher bills– and have little or nothing to do with superior care.  

Mitt Romney may understand that doctors don’t compete on price. But he somehow assumes that if more insurers were vying for your business, our health care bills would fall. This is one reason why he would like to see insurers compete across state lines.

What he doesn’t understand is how little market power many insurers have. The truth is that if too many insurers are dividing a market, none of them will have the market clout to negotiate lower prices with powerful providers.

Finally, free market competition has never driven down the cost of care–either in the U.S. or anywhere in the world. Developed countries that pay far less for care that often is as good or better than ours use some form of  “regulation” and negotiation—not “free market competition” to achieve that goal.  

Only in the U.S. do we let the “free market” set prices for the medical care that we all need. This is one reason why U.S. healthcare is fast becoming unaffordable.

17 thoughts on “Why Market Competition Will Not Lower the Cost of Health Insurance

  1. The whole debate starts with the rightist canard that a “free market” is a good thing. When rightists sat “free market” they really mean laissez-faire capitalism. Adam Smith coined the term “free market” over two hundred years ago and it had nothing to do with laissez-faire capitalism, a system Smith recognized as amoral. Smith’s “free market” meant a system devoid of monopolistic influence, that a system where supply met or exceeded demand thus dictated price. It is a utopian concept, for multiple reasons: limited supply, monopolistic suppliers, human greed.

    To be viewed rationally, healthcare must be viewed as a utility: fixed supporting infrastructure, slowly varying average demand, and highly variable individual demand. Experience has shown this needs a specialized set of regulation appropriate to the task. The goal is of course a fair market not the undesirable laissez-faire situation which rewards cheaters and the greedy.

    The partial deregulation of the electrical grids has proven to have bad consequences by the inability of local utilities to timely respond to storm damage. Indeed only the socialization of utility repair crews (sharing) prevented even longer service outages. Deregulation has also led to building of wasteful long distance transmission lines ( longer wires=more resistance=greater power loss) at the expense of the local grids as CA has shown.

  2. Larry–
    As you say, Adam Smith was talking about something quite different from what Mitt has in mind.
    And yes, healthcare is very much like electricity or heat: it’s a necessity. This is why everyone must have affordable access, and why we need rational regulation, not laissez faire chaos.
    As you suggest, deregulation of utilities has had regrettable consequences.

    • To Larry’s original point of treating health care as a utility… electricity has kilowatt hours as it’s metric, water has gallons used as it’s metric, but health care has no measurable metric for use as a utility. Healthcare’s demand is guaranteed, and pricing has no impact on that demand therefore making healthcare an inelastic commodity. As such, healthcare is immune to most “free market” theory and concepts.
      Based on the principles of supply and demand, lowering pricing requires a decrease in demand. It seems this could be accomplished with a shift toward preventive care. Beginning simple medical interventions such as diet and exercise sooner and more effectively could have more potential to reduce costs in the aggregate than time wasted working out the best way to drive down the price of a commodity no one has to reduce the price of.

  3. my local news paper had a good analogy
    If home building was like health care, carpenters, plumbers and electricians would work from different blueprints and would hardly talk to one another. If shopping werelike health care, prices would not be posted and could vary widely within the same store depending on who was paying.
    What a disgusting mess

  4. One former CEO of a company where I worked was discussing prices and competition. I mentioned to him that a local, family-owned competitor was offering basically the same meal that we were (this was the food business) for a lower price. His surprising reply was “I’m not interested in seeing how cheaply we can sell anything. I want to see how MUCH we can charge and remain in the market. That’s how healthy profits are made.”

    He was correct, of course. Just ask the airlines. Or any utility — gas, electricity, water.. Or — (wait for it….) — your local health care provider. Or your primary care doctor. Or your oncologist, orthopedic doctor or surgeon.

    There are endless examples of high prices that continue to be the norm even in the face of alternatives. Why? Because they can get away with it. Neither they nor the people paying those prices believe the alternatives are as good or better. There is a perception that paying less means having a lower quality of whatever it buys.

    One place to begin chipping away at prices would be to stop making healthcare expenses and insurance premiums tax-advantaged. Tax deductions are a policy tool intended to promote something, not discourage it.

    There was a time when all credit card interest was deductible. It was a policy tool aimed at encouraging borrowing and spending. When that deduction was taken away people thought twice about running up credit card debt. (Unfortunately that was about the time HELOCs came into fashion so homeowners could start using their home equity instead. Houses became private ATM machines. And we see how that worked out.) So it’s way past time that tax policy needs to encourage anything feeding the health care gorilla in the room.

  5. Re: “Developed countries that pay far less for care that often is as good or better than ours use some form of “regulation” and negotiation—not “free market competition” to achieve that goal. ”

    Yes of course they do. I live and practise in one of those countries, the UK. And as I’ve pointed out on your blog before, the USA provides the 37th best medical care per capita in the world, so there are lots of other places with health regulation.

    It seems to me that you are better off being a criminal than a patient in the USA. At least you can count on some sort of lawyer being appointed to defend you. You have some welfare in the USA, but not it seems ‘medical welfare’. Instead you have ‘health insurance’, something better-off people here have in addition to compulsory national health insurance of which the country is most proud and nobody says is the start of the slippery slope to capitalism.

    Looking at Romney and Obama from across the Atlantic, I don’t see anything that will sort out the problem: Your Constitution provides ‘justice for all’ but not healthcare for all. Romney’s idea of a the free market in medicine is likely to help the millions of ‘middle men’ in UK medicine. The problem is simple: Billions and billions are wasted on inane advertisements for prescription and OTC drugs as well as paying non-medically qualified middle men in medicine. Not to mention lawyers of course. Which is where Obama comes in. As a lawyer, he can hardly be expected to reduce the incomes of ambulance chasers by introducing legislation to reduce tort in America, can he.

    From where I am looking, Americans have got two hopes for getting into the Top 20 of healthcare providing countries in the world. No Hope and Bob Hope.

  6. Sorry, I meant ‘slippery slope to communism’ above.
    Proof for stating that the USA provides the 37th best healthcare per capita for its people is in New England Journal of Medicine, 2010.

  7. John & John Ballard

    John –That is a great analogy!And it is a mess. But under reform,we will be experimenting with new systems that encourage co-ordination, better communication, and greater treansparency. At some places, it’s already happening.

    John Ballard–That quote from your boss (““I’m not interested in seeing how cheaply we can sell anything. I want to see how MUCH we can charge and remain in the market. That’s how healthy profits are made!”) is telling
    Though I would say it would work well in some upscale markets, it’s not going to work as well if you’re trying to
    sell children’s clothing. In that market, WalMart et. al. are the winners because they do sell for less.

    I agree that interest on consumer credit cards shouldn’t be tax-deductible. As you say it encourages consumers to run up bills that they cannot afford to pay.

    But healthcare is different. Most consumer spending is voluntary– we don’t Really Need much of the “stuff” that we put on our credit cards.
    Health care spending is rarely voluntary. Most people don’t like spending time in a hospital. Many don’t like seeing a doctor. (Waiting 30 minutes or more; getting underessed, wondering if he’s going to give you bad news, enduring a colonoscopy, hoping he won’t ask how many beers you drink each week . . . )
    This is why health care should be deductible. We want to encourage people to see a doctor when they’re experiencing symptoms. We want them to get Pap smears. We want them to take their children to have their eyes checked.
    Sure, some people will go for unnecessary tests. But there, it’s up to doctors to say “No, you don’t need it” and explain why.

  8. Brian Kaplan—

    No hope and Bob Hope. (LOL- I’ve never heard that one.)

    I know people who have lived both in the U.S. and in the UK
    –they prefer healthcare in the U.K. (even though it, too is
    far from perfect.)

    The fact that a patient in a U.S. hospital really needs an advocate –maybe not a lawyer, but someone watching out for him to make sure he doesn’t fall victim to preventable medical error–is a sad commentary on the state of medicine in the U.S.

    If you read the blog regularly, you know that I disagree with you about “Obamacare”.

    I admit that it is far from perfect. And I agree that President Obama often seems more concerned about corporate welfare than welfare for the poor.
    But he is intelligent, and the legislation that made it through
    Congress is surprisingly good. (Flawed in many ways, but so
    was our Social Security legislation. When it first passed didn’t cover African-Americans. And this was under FDR. But he realized that at the time, it was the best he could get Congress to do.)

    Because this is a huge country, and because so many
    people in this country have a hard time seeing past what Geroge Eliot called “the speck of self,” it will take time to
    reform our medical culture. But I am hopeful that in 10 years, health care in the U.S. will be better, fairer and safer than it is today.

    At this point it seems that Obama will be re-elected. In this
    second term he will no longer having to worry about being
    elected for another term.
    Will he do some of the things that many of us wish he had done in his first term?
    I suspect that over the next 4 years he will let Medicare
    negotiate for discounts on drugs (and devices, I hope).
    I suspect that we may wind up with a public optoin as an
    alternative to private insurance.
    I hope he will continue to raise tax rates for groups that are now paying historically low rates, and use the money to create public sector jobs, investing in public education, children, better payment for Medicaid providers, the environment . . . etc.

  9. In this, and most “healthcare” discussions, there is an underlying assumption that health insurance = health care. This is not the case. Until we unbundle these terms, and use them for what we are, it is difficult to have a meaningful discussion. Insurance is simply a contract – actually a series of contracts. Some things will be paid for at a certain price, if certain people do certain things that the INSURANCE company deems to be appropriate care. Do something that improves well-being (you feel better), and it’s not done by an M.D., and/or it’s something the insurance company deems to not be an appropriate treatment for a particular diagnosis code, regardless of the outcome (how you feel), the company contract will preclude payment. At best, this is basically a casino model. The house (corporation) has to come out the winner and do it’s duty to return investment to the shareholders. This means complex contracts that actually have nothing to do with what results in well-being. Which leads to the second thing to unbundle. Healthcare has been regulated to disease management – of course this is going to be expensive, generally produce poor results (people not recovering from disease).. because people show up to be cared for at the point of disease. The ancient observational sciences geared for well-being to prevent disease to start with are missing – missing from insurance contracts, missing from how most people view their options, and generally dismissed because despite thousands of years of “evidence” it’s somehow not proper evidence. The rub – these ancient medicines are not based on patented pharmaceuticals – there’s no huge profit motive (and associated contract with the insurance company). Language here matters – health insurance is not healthcare; and “health” (as measured by the disease management measures of allopathic medicine) isn’t necessarily, or even frequently well-being. And, isn’t it really well-being we desire? What would embracing well-being as the foundation of what we do look like? Well-being of individuals, of communities, and even of organizations (which doesn’t mean profit above all else).

  10. Your article and the ensuing comments have been a real eye opener. I have always been of the opinion that it was our insurance companies that were driving up the cost of health care, and maybe it is to some degree. But now I really wonder if healthcare would cost any less even if the cost of insurance went down.

    I am talking about the cost of the doctors and hospitals that have to carry insurance for themselves and the liability cost side of things. Of course that would partially come from the number of lawsuits that should never even make it to a courtroom which makes the insurance companies have more costs, which are passed on the the doctors and hospitals and they in turn pass it on to us, the consumers. Who are the very ones doing the lawsuits that drive up the cost.

    I believe a lot needs to be changed in the area of healthcare, and insurance cannot be left out of that, but where to start?

    What about the person who slips on ice and falls and injures themselves? Are they entitled to compensation? Why? No one, that I am aware of, intentionally puts ice on a walkway, but they might not have gotten it all removed, or it may have melted and re-froze, so why would they be held liable when someone walks on it?

    So it is not just healthcare and insurance, it is an attitude throughout our country that needs changing.

  11. Deb–

    I totally understand what you are saying about the difference between “health care” and “health insurance.”

    But under health reform, more and more insurers will be
    joining providers in “accountable care organizations” where both the insurer and the providers will have the same goal: keeping a group of patients healthier. If the providers are able to achieve better outcomes at a lower cost (for instance managing chronic disease so that patients don’t wind up in the hospital, they will be paid more. IF hospitals become
    more efficient, reduce errors, and diagnose diseases without having patients see by 12 specialists, they will be paid more.

    This it the future of health care. But it will take time.

  12. While I have many misgivings about the potential effectiveness of “Obamacare”, its unwieldy size, and some of its unintended financial consequences, it is rather ironic that Obamacare was modeled after what Romney passed in Massachusetts. It is even more ironic, that when considering what is best on a national scale, Romney defaults to reliance on market forces to balance the system.

    Perhaps even more scary, however, is Romney’s preference for high-deductible health insurance plans coupled with health savings accounts. While the desire to unravel employer-based health insurance (and its tax incentives) and encourage portability is admirable, as is empowering consumers/patients to make choices, this certainly can’t be his panacea for the average Joe with average wages and little disposable income.

    While the seeming intention is to reduce entitlement and costs by encouraging consumers to pay for routine medical expenses, the healthcare literature is replete with studies showing the unintended consequences of healthcare decisions based on personal finances. Invariably, the temporally expedient choices of many middle and low income families lead to greater healthcare costs down the line. It has been shown repeatedly that when people are faced with difficult financial choices, they often opt to forego or reduce necessary medical care (drugs, diagnostics, and procedures), resulting in much greater costs when the condition ultimately becomes more severe. These types of decisions occur regardless of whether a family is insured, and have been particularly evident in our tight economy, where people are forced to weigh basic necessities. Is Romney ignorant of this, or is he simply choosing to deny it? This is a recipe for potential economic disaster.

  13. Fern and Ann

    Ferm–Welcome.
    Everything you say about middle-class families foregoing necessary care when they have high-deductible plans is true. They’re not in a position to know which test is necessary and which isn’t. Should they visit a doctor because they have a red spot on their hand that won’t go away?
    This is why, under the Affordable Care Act, there are no co-pays for preventive care. When patients skip preventive care, that only leads to higher costs down the road.
    Does Romney understand that the average Joe is not a M.D?
    Hard to know what goes on in Romney’s mind. The difference between the stance he took in Mass and the stance he now takes on healthcare suggests that he will say anything that he thinks will play to that particular audience.

    What he thinks privately? Impossible to say. Does he even have an inner life where he engages in dialogue with his better angel? Impossible to say.
    I agree, there are reasons to try to “unravel” employment and health insurance, but this will take time. Right now Obamacare is trying to address the needs of people who work for small employers who cannot afford to give them good benefits, the self-employed and the uninsured.
    In a later stage, reformers plan to open the Exchanges up to employees of large companies.
    But this is an enormous country; we need to do this in stages.
    And at present, many people who work for large companies are fairly content with the health care they have now. (Though the co-pays are rising).
    As for the unforeseen financial consequences of Obamacare, as they become apparent, we’ll address them, just as we addressed the unforeseen consequences of Medicare and Social Security. These enormous programs always need to be tweaked over time.

    Ann–
    As we talk about health care reform, more and more people are realizing that health insurance premiums are so high because the underlying cost of care– the products and the services are so high. We pay far more than people in other developed countries for everything: drugs, medical devices,
    ICUs, and doctors’ services– even after adjusting for differences in the cost of living and the fact that in other countries medical education is often subsidized.
    Malpractice litigation is actually not a huge factor in the cost of care.
    Less than 5% of patients who are the victims of malpractice sue. (People may sue when they slip on a sidewalk, but they are reluctant to sue their doctors. Some understand that doctors are human. Others just don’t want to face the fact that their doctor or hospital made a preventable mistake and hurt them–it’s too scary. They want to have faith in our medical system.)
    Awards and settlements equal a tiny percentage of total health care spending. Million dollar awards are rare.
    But for an individual doctor an award or settlement can be costly–and emotionally devastating.
    The good news is that more and more hospitals are learning to disclose what happened to patient and/or family , , explain how sorry they are (assuming an error was made), and offer a settlement. This means everyone can avoid the huge expense of going through the legal process called “discovery.” (This is when lawyers pore through boxes full of documents trying to figure out what actually happened, getting a judge to subpeona more doctumerns-e-tc. –can go on for a year or more.)
    Most patients hate being “stone-walled”– doctors and hospital refusing to tell them what happened. If they are given the information most are not nearly as angry and a settlement can be reached.

    For individuaal doctors in certain specialities (obseterics, for instance) the cost can be high–particularly if they are in private practice. But today, the majority of doctors work for
    larger organizations that cover their malpractice insurance and are in a better position to get a fairly good price.
    Fear of being sued can lead doctors to recommend unnecessary drugs and treatments, just to cover their bases.
    But too many docs order unncessary drugs and treatments for other reasons: the pharamceutical companies rep has persuaded them that they should recommend the pricier product; the device manufactuer has paid him to “consult” and give lectures at conferences where he is persuaded to use the device makers most expensive knee impllant.

  14. We believe we require armed forces, led by officers, (generals) that have training and experience to do a good job. We do not hire them personally, and do not pay them out of pocket, or by making monthly installments to a defense policy of our choice. The military infrastructure is large, complicated and expensive, rather like the health care infrastructure. Every citizen gets “The best protection the country can provide” as defined by ongoing political dialog among our elected officials. We may be 37th in the world regarding health care, but we still make the world’s best weapons. Is there a lesson here? The military leaders do not set the level of protection, or what it costs. They make recommendations, but other civilian authorities decide what is important, and how much the country can afford to spend on it. The military does not receive their operating protocol from the IRS, The Federal Reserve, or the Department of the Treasury. The public can elect decision makers who support their views as to whether there is too much or too little being spent on protecting them. I am not saying I want the DOD to administer my health care. I am saying the infrastructure and personnel requirements are similar enough that we can learn from the military establishments, pluses and minuses to develop a program that provides a level of healthcare that we can feel “safe” with.

    • Jim–

      An interesting idea.

      The only catch is that so many of our elected representatives depend on contributions from lobbyists
      in order to be elected.

      Thus, as Dwight Eisenhower tried to warn us, the “military-industrial complex” has managed to persuade
      Congress to over-spend and over-pay for weapons (not to mention toilet seats).

      This is why I would prefer to see Medicare, HHS and the FDA rely on independent medical research to decide
      what we need to cover and how much to pay for it.

      Does such research exist? Yes, European countries use it to
      make those decisions. This is one reason why they pay less for care that often is better than the over-priced care
      that we receive in the U.S.

      Luckily, the Affordable Care Act calls for using evidence-based comparative reserach to decide what we will pay.
      And the law gives HHS quite a bit of room to go around Congress so that politiicans (and lobbyists) are not
      making the decisions.