from The Incidental Economist at http://bit.ly/2tkjipC on July 6, 2017 at 02:01PM
Austin and I have a piece at the JAMA Forum (it’ll also come out in an upcoming issue of JAMA itself) explaining why health plans don’t really compete with one another over the treatments that they cover.
Doing so requires good evidence on how well therapies work, but that evidence is often lacking. Insurers lack the right incentives to develop the evidence on their own because other insurers will free-ride on their efforts. And the government can’t pick up the slack because Medicare is barred from considering costs in choosing what to cover.
The law also poses an obstacle. The favorable tax treatment of employer-sponsored coverage encourages employers to offer expansive health plans. The courts are reluctant to construe contractual terms to allow insurers to refuse coverage, and they will sometimes side with “expert” opinions about medical need even where evidence of a treatment’s efficacy is lacking. And legal rules (including state coverage mandates and the ACA’s essential health benefits rule, which applies to individual and small group plans) may prohibit insurers from restricting the scope of coverage.
In principle, we could change the law to encourage plans to compete on cost-effectiveness. In practice, we doubt it would work. …
So if you’re one of those people who’d prefer a cheap plan that excludes glitzy treatments, you’re out of luck. You’ve got to buy a plan covering all medically necessary care, even if that care has little proven value or is wildly expensive.
The lack of competition between health plans interacts with the increasing market power of providers in disconcerting and under-appreciated ways, as Clark Havighurst and Barak Richman nicely explain in this 2011 paper:
At the same time that health insurance ameliorates monopoly’s usual adverse effects on output and allocative efficiency, it greatly exacerbates monopoly’s other objectionable effect, the redistribution of wealth from consumers to powerful firms. In the textbook model, the monopolist’s higher price enables it to capture for itself much of the welfare gain, or “surplus,” that consumers would have enjoyed if they had been able to purchase the valued good or service at a low, competitive price. In health care, insurance puts the monopolist in an even stronger position by greatly weakening the constraint on its pricing freedom ordinarily imposed by the limits of consumers’ willingness or ability to pay. This effect appears in theory as a steepening of the demand curve for the monopolized good or service. …
Even under orthodox theory, therefore, health insurance enables a monopolist of a covered service to charge substantially more than the textbook “monopoly price,” thus earning even more than the usual “monopoly profit.” As serious as this added redistributive effect may be in theory, however, it is rendered even more serious in practice by certain deficiencies in the design and administration of real-world health insurance. For legal, regulatory, and other reasons, … insurers … pay for any service that is deemed advantageous (and termed “medically necessary”) for the patient’s health, whatever that service may cost. Consequently, available “close substitutes” for a provider’s services do not check its market power as they ordinarily would do. Indeed, putting aside the modest effects of cost sharing on patients’ choices, the only substitute treatments or services that insured patients will accept are those they regard as perfect ones. Unlike the situation when an ordinary monopolist sells directly to cost-conscious consumers, the rewards to a monopolist selling goods or services purchased through health insurance may easily and substantially exceed the aggregate consumer surplus that patients would derive at competitive prices.
Discussions of antitrust issues in the health care sector rarely, if ever, explicitly observe how health insurance in general or U.S.-style insurance in particular enhances the ability of dominant sellers to exploit consumers. … Yet, the effect we identify has potentially huge implications for consumers and the general welfare and thus for antitrust analysis not only of hospital mergers but also of other actions or practices capable of enhancing provider or supplier market power.
Monopoly in any market is bad. In the health care market, however, the presence of insurance—and especially insurance that is insensitive to the value of the treatments that it covers—makes monopoly much worse.