So says Sarah Kliff in a piece up at Vox that does a good job of reminding us that the fundamental problem with the American health care system is that health care services are very expensive and pricing is incredibly opaque.
It’s important to understand the basic contours of the health insurance system to be able to make a judgement on just how much bullshit is in any politician’s health care plan. So let’s take a quick, 10,000 foot view of the health care system.
Health care transactions have three parties: the consumer, the provider, and the insurance company. The provider prescribes services to the consumer, who then purchases them. Mediating this transaction is the insurance provider, who pays (or doesn’t) some portion of the cost based on arcane criteria.
It’s probably better to think of health insurance less as insurance than as cost sharing. With that in mind, we can imagine all of the people with health insurance being divided into several cost sharing pools, each with slightly different agreements as to what costs will actually be shared. The largest pools are run by the government: Medicare, and 51 state Medicaid pools. Then there are the private insurance pools within each state. Most people are entered into a pool via their employer provided insurance plan, with the ACA markets intended to cover the rest.
To a first approximation, the average cost of health insurance to a person in a given pool is a function of the price of health care, quantity consumed by people in the pool, and number of people in the pool.
The ACA was primarily aimed at extending insurance coverage to the approximately 20% of Americans who were without health insurance. Why were 20% of Americans without coverage? People fell into one of two camps: 1) They didn’t want health insurance, because their expected benefit was less than their expected cost; if you were young and healthy, insurance was going to cost more than you would get out of it. 2) They wanted health insurance, but couldn’t afford it because their expected costs to the insurer exceeded what they could pay. So the end goal was to get that C down to a point where people category 2 people could afford insurance.
Again, to first approximation, what the ACA did with the marketplaces was increase that n. By making a pool larger, average costs could be driven down for any one person. However, there is a complication. Increasing n will also increase Q some amount; quantity of health care consumed is a function of the number of people in the pool, i.e. Q=f(n). So you need to add in more people who will consume less health care, people whose costs are lower than average. Cost sharing only works if some people incur less costs than others. That’s why the individual mandate to purchase health insurance was necessary to get those category 1 people from above into the pools. Inevitably, you had to make some people worse off to make others better off. In essence, it’s just simple redistribution. Average costs go down, but the per unit price of health care is unaffected.
If you take prices as given, then, the optimal solution to reducing average cost would be to have the biggest pool possible; it really doesn’t make sense to have hundreds of smaller, regionally based pools, especially when there are fixed costs to running an insurance pool (administration, billing, etc). That’s the idea behind single payer; put everybody into one big pool and call it a day. But the insurance lobby is large, and that would put a lot of people out of jobs, so the ACA kept the private insurance system.
To make this system work then, a series of subsidies was necessary, especially since the ACA also mandates that all plans must cover a minimum set of benefits (i.e. an insurer cannot offer a product worth less than this defined minimum). This would drive up prices again, so the other necessary pieces were 1) tax credits, so the cost of insurance to low income families is shared by the universe of taxpayers, and 2) cost sharing payments to insurance providers, where the government directly pays them if they stand to lose money on such plans (also paid for by the universe of taxpayers).
(As an aside, this means that Trump’s decision to end cost sharing payments to insurers merely shifts the locus of redistribution; since these companies will now just charge higher prices for their plans to be able to turn a profit, that means the money that would have been paid to insurers is now…paid to them via the tax credits to consumers.)
So again, if the main goal is to decrease the average cost of health care, putting everyone in one big pool would seem to be way simpler and more efficient, taking prices as given.
But should we take prices as given? Of course not. Let’s say prices are a function of quantity of health care consumed, market power of the provider, bargaining power of the insurer, and insurer overhead.
An increase in consumption will drive up price in the short run, so there’s the potential that increasing access to health care will end up increasing prices if people consume lots more. The key here is elasticity of supply; how much and how fast can the supply of medical services respond to increases in price? We’ll return to this later.
What is the market power of the provider? In many rural areas, there simply aren’t very many health care providers; maybe there is one hospital, which is a monopoly, and monopolies can charge above market rates. I think this is a key fact as to why the price of health care in the US is so much higher than every other developed country; we are a very large country, with lots of people living in not very dense areas, so there are lots of regional health care monopolies.
Then there is the bargaining power of the insurer. Larger insurers can demand lower per unit prices via volume. It’s the same principle as buying at Costco: in bulk, you can get a lower unit price. This can act to countervail monopoly power. A secondary idea behind the ACA was that the exchanges would force insurers to compete on price, and hence drive down health care costs. Part of that would come in the form of reducing overhead (more efficient insurers could charge less), and part would come from that increased bargaining power (from larger size from forcing people into the exchanges).
Even with the subsidies, in a lot of places insurers simply don’t find it worth their while to offer plans on the exchange. The mandate was not strong enough to get everyone into the exchanges, so mostly sicker people were buying the plans, meaning they cost too much. Other elements in the ACA actually encouraged the consolidation trend in health care services, meaning the market power of regional health care providers has continued to increase. Low enrollment in rural areas with monopoly health providers isn’t a recipe for profits for most of these insurers.
The ACA is not inherently doomed, but requires tweaks to get the right levels of cost sharing and subsidies in place. But again, you should ask yourself, why do it this way? And again, the simplest way to get average costs down would seem to be to put everyone into one big pool; if size leads to bargaining power, then one big pool will have the most bargaining power to negotiate lower prices.
Okay, so maybe that wasn’t so quick; who knew health care could be so complicated?
So what’s crazy to me is that almost nobody of prominence talks about any sort of plan to directly get prices down. Prices are the key, as the Vox piece highlights; if the cost of health care is cheap, then maybe we don’t have to worry about any of this crazy cost sharing business. Maybe the reason nobody talks about it is because nobody has any clue how to do it, but it seems that there are some rather obvious fixes, which I’ll get into next time.