Tuesday, October 15, 2013

The Health Care Market

The form of a competitive market in health care may be emerging.

An article in the September 19 issue of The Boston Globe reported that Walgreen, the drug store company, was converting its health care benefit to one of defined contribution.  Defined contribution means that the employer pays a fixed amount towards the cost of the employee’s health insurance.  The employee then selects and buys an insurance policy and pays the difference if the policy selected costs more than the employer pays.

Walgreen employees will buy their health insurance through an exchange that includes as many as 25 insurance companies.  The exchange will be set up and run by consultant Ann Hewitt, who also performs this function for Sears and Darden Restaurants, which operates the Red Lobster and Olive Garden chains.  Presumably, one purpose of this arrangement is to help employees make informed and responsible decisions about which insurance policy to select.

The Walgreen benefit manager was quoted as saying “I think the only way to drive down costs in the health care space is to have the consumer buying the health care be knowledgeable and educated and understand what they are buying.”

The assumption seems to be that insurance companies will compete in the exchanges by trying to offer an attractive package of benefits and holding their premiums down by negotiating the prices they pay providers and controlling the rate at which services are utilized.  Providers will be able to accept that only if they gain effective control of both cost and the utilization of services. 

Up until now, providers have not shown much inclination to do either one and people don’t like it when insurance companies get involved in controlling utilization.  We will see whether under the defined benefit approach, insurance companies can find a way to cause providers to get serious about both.

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