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.


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