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What does the public plan equilibrium look like?, part III
I'm still thinking about this topic and I will refer you to a response by Frank Pasquale. He knows a lot about the topic but I'm still not sure how to translate his points into econspeak.
Here is another way of looking at my original question: some of the key (possible) problems in private insurance markets are adverse selection and lack of transparency in prices and terms of service. Previously I asked whether the public plan does compete with the private plans for the same pools of customers. Today I am asking whether greater competition necessarily improves these outcomes. (It's trickiest when it comes to transparency; you might think that a more transparent plan will outcompete a less transparent plan, but the whole point of the lesser transparency is to make the plan look more attractive than it really is. A truly transparent plan could look not so attractive at all. The model here has many relevant iterations, with unclear results. You get the best results when the presence of a transparent plan educates consumers about the nature of the market more generally, rather than just educating consumers about the nature of the transparent plan. But that is hard to do)
As Pasquale points out, a lot of state insurance markets are currently not so competitive. As it stands today, do the more competitive markets offer superior performance? I genuinely do not know but I would like to see the evidence on this question.
Posted by Tyler Cowen on June 10, 2009 at 11:15 AM in Medicine | Permalink
Comments
The biggest problem that I have with the public plan is that the government would be competing AND it would be regulating, "cutting costs" (read: setting prices for itself and its competitors), and making up new rules as we go along. Any investment that is required by the private sector to compete (either maintenance or new capital investment) will need to made in this context. Essentially, the private insurers will be operating in a world that they will perceive is stacked against them and will invest accordingly. In that world, the public plan will be able to invest in profitable technologies and use its investments (and the lack of private investment) as an excuse for an eventual takeover of the market.
This is not paranoid. This is just a version of Gresham's Law in action.
Posted by: Highgamma at Jun 10, 2009 11:37:25 AM
Despite the theoretical arguments, I was under the impression that health care markets were prone to advantageous selection and not adverse selection. Is this not the case?
Posted by: Dan in EuroLand at Jun 10, 2009 11:44:51 AM
Thinking about the private market only, there's a tricky balance that isn't receiving much attention (yet). All other things equal, greater competition in the insurance market weakens plan power with respect to providers, leading to higher provider prices. On the other hand, insurers with large market power may negotiate lower prices from providers but not pass them on to policyholders. This market requires a two-sided analysis, about which I'll blog very soon at thefinancebuff.com.
Posted by: TIE at Jun 10, 2009 11:52:36 AM
More competition means more and smaller insurance providers. That means either less risk-pooling (and hence, more insurance company bankruptcies) or less insulation from costs. People say they want "insurance" - risk pooling - but they actually seem to want insulation. Adding transparency and smaller insurance companies means that this contradiction would become more obvious.
Posted by: Alex J. at Jun 10, 2009 12:28:06 PM
I don't feel like I can adequately answer the question (do I fully understand it?), but let me offer this thought. The process of competition serves to improve (economic) outcomes via brutal Darwinian selection. Consumers will choose the plans that have the best available balance between coverage and price, meaning that the market will (in the long run) tend toward providing plans that group about the population mean preference.
Three questions, then. First: what will be the effect on consumers of the selection process? Will consumers gravitate away from poor plans because they've been 'burned', so to speak, by being forced into pauperhouse by poor coverage, or will there be other reasons?
Second: will the long-run equilibrium be optimal? What will be the negative externalities of those unlucky ones who are at the balance and just happen to be screwed over by a horrid, long-term disease? What about humane considerations?
Third: what will be the distribution about the preferred balance between coverage and cost? Unless a public plan (as it should) provides insurance at little or no cost to low income, low cost will provide low coverage, underinsuring those with low incomes.
Posted by: Neal at Jun 10, 2009 12:28:35 PM
The arguments are getting so esoteric and it's a shame. When things are critical, I don't find the mental mastication fun. What could be simpler than "please save for unforeseen medical expenses. Here is a tax-sheltered account to help, and here's a few catastrophic, high-deductible policies to choose from."
Posted by: Andrew at Jun 10, 2009 1:18:30 PM
My view of the public option is that it addresses the coodination problem on the supply-side. The coordination problem requires service delivery and cost allocation/settlements of complementary products. Healthcare is multi-provider in that its delivery requires the coordination of multiple providers. Coordination can occur in a competitive context through standards (best practises); or it can occur through monopoly. Cost allocation usually involves prime and sub contractors. It provides a best practises model of how coordinated healthcare should work.
If the public option produces a better product at lower cost than private health care in spite of the public option's built-in cost disadvantage (high cost elderly and low income paid for by a tax on private plans) then the private market should quickly adopt similar models. I assume it includes Medicare and Medicaid and whoever else wants to opt in. How could/should it work? Like VA healthcare: best practises, electronic records, oriented toward outcomes at minimum cost.
Many of the other "solutions" seem to me to be misdirected. Demand-side solutions: There already is lots of pressure on the demand side to reduce consumption from high premiums and business (through insurance companies)unwillingness to absorb higher costs. Moreover, internationally the U.S. seems already to be a pretty low consumer of healthcare services (http://wikileaks.org/leak/crs/RL34175.pdf).
Supply side competitive solutions: Competition on the supply side does not seem to be the issue, in fact the opposit seems to be the case: the more the provders the higher the cost.
There are a lot of confusing issues. What should be provided: heathcare (both preventive and curative)? Health insurance? How should it be priced? If I am risk adverse why shouldn't I buy a comprehensive policy? If I prefer fixed to a la carte price why should that not be provided?
Posted by: gnat at Jun 10, 2009 2:08:24 PM
A little recognized fact is that roughly half of all privately insured employees are in insurance plans that are self-insured plans operated by their firm. There is no big, bad insurance company extracting excess profits. So the argument that insurance companies are the cause of any problem, or the solution to any problem, in the US health care system is over stated, particularly when 50% of all spending is by government for Medicare and Medicaid.
The public plan will experience what every other type of health insurance plan worldwide experiences--rates of growth that exceed growth in income. It may, however, result in a one time reduction in spending due to the monopsony power that it will inevitably exercise to mediate the tension between maintaining access and holding down costs.
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If you want to argue against a public plan, argue that the insurance model is totally wrong, and the public plan or any single player plan is wrong.
Instead, argue the only solution is for doctors to assume the risks in health care, but because one doctor can't be trusted with carying the risks along, just as one insurer with a small number of policies can't be trusted, the doctors must operate as a group, get paid a fixed price per patient, not be allowed to turn down anyone who applies, up to a maximum number of slots per doctor. Out of the per capita fee, between 20-40% can/must be used to reinsurer the possibilityof high risk. No outside patient care income is allowed.
Now, groups of doctors are faced with a major share of the risk and they will:
- work together to provide better and cheaper care
- not have any incentive to do more than is required
- have a lot of incentive to do enough to limit total cost of care
They won't be able to just add more patients to increase income. They won't be able to mistreat patients because patients will leave them.
The Japanese use micro econ theory to adjust prices: if the quantity of something is going up, the price is too high; it there is too little, the price is too low. So, if the number of primary care/family practice/GP doctors is too small to create at least some doctors with open slots, then raise the price per patient per month. If too many open slots, lower prices (or not raise them as population increases).
And assess a penalty for a premature death, excluding events like accidents; provide a pot to pay for the actarial expected deaths. The doctor keeping patients alive will get a bonus, but the doctor providing poor care will start losing money in death penalties.
The doctors in a group have big incentives to be right, or more right than other groups, so the spend less on care. They have a big incentive to be patient friendly to always max out on patients.
And with older patients or other terminal patients, lots of incentive to give them good deaths, by taking the time to help the patients an family accept the end, instead of just pouring in pointless end-of-life extend-poor-quality-of-life procedures.
Posted by: mulp at Jun 11, 2009 3:42:27 AM
A transparent plan may out compete a non-transparent plan, especially if the transparent plan points out the "hidden costs" of the non-transparent plan. A lot of airlines and banks already compete in this way.
In the courtroom, you can argue that the side that lies the most (to make themselves look good) should win too. That's only true if the other side doesn't point out that they're lying. Shouldn't this be true in insurance markets too?
Posted by: Scott Wentland at Jun 11, 2009 4:30:55 PM
I don't get this argument. If insurance companies can make more money being dishonest, then why would we want to preserve them?
Also ... if the public option is so much worse than private insurers, then why worry about it? If it doesn't work, no one will choose it.
Posted by: Tony at Jun 17, 2009 9:05:46 AM
One thing that gets overlooked is the tremendous deadweight costs that employer-supported healthcare puts on American businesses.
I mean, a company will outsource its development, its back office, and its cleaning ... but it has maintain a competency in health care? Why should we expect businesses to be social welfare organizations? That's ridiculous, and anti-capitalistic.
Posted by: Tony at Jun 17, 2009 10:41:06 AM
A truly transparent plan could look not so attractive at all. The model here has many relevant iterations, with unclear results.
Posted by: Wrought Iron Furniture at Jul 31, 2009 2:33:52 AM
I think this is true the best results when the presence of a transparent plan educates consumers about the nature of the market more generally, rather than just educating consumers about the nature of the transparent plan.
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