Rules of the Market Do Not Apply to Health Insurance Companies

Posted by Matthew Holt, The Health Care Blog at 1:32 PM on June 2, 2008.

Buried in a quick notice in Business Week was this paragraph:

Health insurance companies have plenty of critics. Now they have one more: Leemore Dafny, an assistant professor at Northwestern University's Kellogg School of Management. Insurers argue that because they compete against one another, they keep prices down, saving everyone money. Not necessarily, says Dafny in a March paper, "Are Health Insurance Markets Competitive?" Dafny looked at data from 1998 to 2005, provided to her by a benefits consulting firm, that tracked the behavior of 200 major companies to see whether they shopped around to find the cheapest insurers. Dafny found that when these big companies made more money, their insurance providers raised their premiums. But instead of dropping the carrier to get a better deal, Dafny writes, companies generally stuck with their health insurers and paid more. "Carriers can and do take advantage of a firm's increased profits and extract higher prices from them," she says.

Here's how this works:

Health plans keep a percentage of the premiums paid by employers (and the government) in health-care costs. And if they're really clever, they can increase the percentage they keep, a process known as reducing medical loss ratios. During the period Dafny studied, health plans got very, very good at that. (Here's the Aetna story if you needed reminding).

Of course, the notion that health plans are just another supplier to their employer customers is wrong. Messing with the employees' health-care arrangement is about the last thing employers want to do. Also, beating up on suppliers who don't look after the CEO's children or spouses tends to lead to less pain for the relative gain. So in the end most employers don't make too much of a fuss about health care, especially when times are generally good. Most plans, therefore, mark up the costs they pass through from providers as much as they possibly can.

I've been saying this for a long time, and now a Northwestern academic actually agrees with me! Here's Dafny's paper (pdf) if you want to check the details.

Tagged as: health, health insurance, insurers