Wednesday, March 14, 2012
The Way It Is
Competition is frequently mentioned
as a means of controlling the cost of health care but seldom, if ever, with any
explanation of how it is supposed to do so.
A late example is a story in the
March 13 issue of The Boston Globe reporting an announcement by Kathleen Sebelius,
Secretary of the US Department of Health and Human Services, that guidelines
had been issued for the development of the “new state-based health insurance
markets that will offer consumers one-stop shopping, along the lines of
Amazon.com.” These are the markets
required under the Affordable Care Act, popularly known as ObamaCare.
In her announcement, Secretary
Sibilius said that “More competition will drive down costs….” but made no
mention of how it would do so.
The Secretary presumably was referring to
competition among insurance companies and a reduction in the cost of health
insurance premiums.
Health insurance
premiums cover three main items:
administrative costs, profit and the cost of the services covered by the
insurance policies. Insurance companies
already have an incentive to keep administrative costs as low as they can since
doing so increases profits. Competition no
doubt keeps profits in check, but at their highest they comprise only a few percentage
points of the cost of insurance. Profit
as a percentage of premiums is not rising remarkably and is already restrained
by existing competition among insurance companies.
The big
item making up the cost of premiums is the cost of paying hospitals, doctors
and other providers for the health services used by subscribers. Unless the competition has some impact on
that, its effects on the cost of health care won’t amount to much.
If
competition is to be effective in controlling the cost of health care, it has
to be competition among providers. The
market has to steer patients to providers who provide the best combination of
cost, quality, and patient satisfaction.
The providers who don’t compete successfully in those areas will be
forced out of business.
That may not
sound very pleasant, but that’s the way it is.