I believe in the free market; companies that provide value are rewarded by customers and earn profits.
With that premise, I began to wonder how, year after year, health insurance companies in the U.S. can be so incredibly profitable ?
Health insurance companies do not appear to improve the health of the patients they serve. Even if they did, there is no evidence that the more profitable health insurance companies do a better job of improving the health of their patients.
Unlike companies that provide other types of insurance, they are not at risk. Most health insurance is through employers, and the employer bears the financial risk. The insurance companies just administer the plans.
The insurance companies do not appear to pay claims efficiently. It is not unusual for more than 20% of every dollar spent on health claims dollars to go to the insurance company's administrative overhead, and this figure does not include the administrative costs doctors and hospitals incur in having to deal with insurance companies.
Why are these companies being rewarded so well when they do so little to help patient care? What am I missing?
I now believe that I have been mistaken in thinking of patients as the customer. Patients do not choose their insurance plans. If they do, they often only get to choose among the one or two plans offered by their employers. The employers are the ones making the real purchasing decision, and they are therefore the real customer. Their primary marketing efforts therefore need to be toward employers.
Patients are not even secondary customers. Most employers choose plans based on cost and range of doctors and hospitals that are available through the different health plan options. It is therefore a critical job of the insurance company to get doctors and hospitals to accept their insurance at the rate the insurance company pays. The insurance company's secondary customers are these providers and they therefore need to focus resources on their provider relationships.
I would say patients and their families are third in the list of priority. If patients are dissatisfied, perhaps their needs are prioritized to a lesser extent.
And yet, if employers are the customers, don't they still want high quality cost effective care? Why are employers rewarding insurance companies with such large profits? Couldn't they simply bypass the insurance companies and pay providers directly? Large employers are already assuming the financial risk. Cutting out the insurance company seems like the next logical step.
The reality is that in the current system, employers need the insurance companies since only insurance companies are large enough to negotiate the best prices with providers. The discounts that large insurance companies get more than justifies their profit. A patient with insurance who does not have a contract with a given hospital may be obligated to pay double or triple what they would otherwise have to pay. This more than justifies the insurance company profits. Without the insurance companies, employers would have to drastically overpay for each claim. Health insurance companies are really contracting machines. Everything else they do is secondary.
But how does this contracting effort help patients? It doesn't. The current health system allows insurance companies to compete in something that is of no value to patients or society. The system rewards local monopolies with the best contracts; healthcare quality and efficiency are a lesser concern. Those who generally expect the free market system to improve healthcare often do not appreciate this dysfunctional dynamic.
Just as those who implemented the antitrust laws 100 years ago discovered, I now realize that Adam Smith's invisible hand sometimes needs help.
