health insurance market – The Health Care Blog

What Makes Health Care Different

Nov 1, 2018

By Donna Dubinsky

As best as I can tell, the arguments at the Supreme Court did not touch on a critical part of the discussion about government’s role in health care: the broken market for private insurance. And I think I know why.

A key assumption underlying the arguments, questions and answers was that all uninsured people are uninsured by choice. Sure, some very ill people with preexisting conditions do not qualify. But the implication was clear: Most uninsured people either do not want to pay for insurance or cannot afford it. Justice Samuel Alito said, “You can get health insurance.” Justice Ruth Bader Ginsburg made the point that people who don’t participate are making it more expensive for others, that their “free choice” affects others. The “free rider” problem is thoroughly examined.

It was as if the court forgot that the private insurance market does not function as a normal market. If you are not employed and you want to purchase insurance in the private market, you cannot unilaterally decide to do so. An insurer has to accept you as a customer. And quite often, they don’t. Insurers prefer group plans, with lots of people enrolled to spread the risk. Can you blame them? The individual consumer is a lot of work, is a higher risk and produces relatively little revenue.

If We Want Lower Health Care Spending, We Are Going to Have to Pay for It

May 26, 2014• 13

By David Dranove & Craig Garthwaite

Ultimately, spending less on health care is a relatively easy task: We either need to consume fewer services, or spend less on the services that we consume. But much like we teach our Kellogg students about maximizing profits, the devil is in the details.

It’s certainly tempting to ask the government to swoop in on a white stallion and solve the all our problems by fiat. For example, we could have the government simply exploit its monopsony power and set prices, but an artificially low price will lead to an inefficiently low quantity of services and future innovation (stay tuned, we will have more to say about this next week).

Similarly, we could explicitly ration quantities (as opposed to implicitly doing it through a large uninsured population). But how could we hope to determine the right level of care? Ultimately, if we ask the government to unilaterally fix this problem, instead of a white stallion we could behold a pale horse and all that it entails.

The good part, perhaps the best part, about the Affordable Care Act is that it attempts to address this problem using market forces. The question is whether we are ready for what these market forces will entail.

We will focus today on the role of market forces in the insurance market to control prices in the newly established ACA exchanges.

This month the Obama administration announced that it would allow insurers to use “reference pricing” for insurance programs in the exchanges. Under a reference pricing system, insurers set the maximum price they will pay for a specific set of services and if patients go to a facility that costs more than that amount they are required to pay the difference.