The Evolving Economics of Health Care

When President Obama and the Democratic Congress passed the Patient Protection and Affordable Care Act last year to reform the nation’s health system, they didn’t schedule all of the transformational regulations to take effect immediately. For instance, the central innovations of the plan — a legal mandate to purchase health insurance, paired with the development of state-based insurance exchanges — were assigned full implementation dates in the year 2014.

In the meantime, though, the economics of the American health care industry aren’t just sitting idly by, waiting for the legislation to take full effect. Instead, as economic conditions evolve, organizations are making plans and taking steps to position themselves to exploit the terms of the new law.

Regrettably, from the perspective of American consumers of medical services, these steps are driving the costs of health care into the stratosphere. And if the process continues to play out in accordance with current trends, there may not be much of a competitive, free market health care system left to regulate by the year 2014.

Fewer Insurers

Let’s begin by considering the number of insurance companies that are now competing with each other to offer health care policies to consumers. Because we allow these firms to eliminate their competitors by simply acquiring them, the competitive market continues to shrink into smaller and smaller clusters of firms.

Furthermore, these insurance companies are focusing more intensively on providing services to enrollees in federal government programs. That’s why Cigna paid $3.8 billion to buy Healthspring, for instance, and why Humana acquired MD Care. In each case, a huge insurer became even larger by purchasing a potential (or actual) competitor in the field of government services.

A health care industry with very few insurers simply doesn’t function in the same manner as a competitive market place. Firms in such industries are relatively less likely to compete based on factors like quality, innovation, and superior service; instead, they are relatively more likely to focus on strategies like maximizing prices and passing along the costs of medical care to customers. With fewer competitors to challenge them on the first set of factors, firms enjoy the freedom to focus instead on the second set of factors.

Fewer Payors

Of course, if the market were to be dominated by large numbers of strong payors — such as employers or trade associations, entities that purchase health care benefits on behalf of their employees or members — one could rely on the payors themselves to compel insurers into competing on the basis of quality. Unfortunately, though, the American health insurance industry is losing payors, not adding them.

Consider Walmart, for instance. The largest employer in the United States has shaken up many industries with its mammoth purchasing power, and could conceivably play the same role in the health insurance industry. But the firm appears to be more interested in driving employees out of its health plans than aggressively purchasing health insurance policies on their behalf, as evidenced by their recent increases in employee health premiums, as well as their refusal to cover certain part time employees.

Some commentators have voiced concern that the implementation of a national network of state-based health insurance exchanges, given its ability to serve as an alternative to employer based health insurance coverage, would result in employers dumping their health benefits benefits entirely and driving their employees onto the exchanges. In fact, some believe that Walmart is planning to execute that very strategy, and is now driving up the employee costs of health care to unaffordable levels in pursuit of this goal.

On Their Own

Even the most avid supporter of a single payor program, financed and managed by the federal government, would likely concede that a truly competitive free market health care system would be highly beneficial to consumers. Imagine a city filled with thousands of insurers and payors, of every conceivable shape and size, eagerly searching for any strategic advantage that could differentiate them from their competitors and help attract new consumers.

Now that’s a fairly compelling scenario, isn’t it? With thousands of competitors occupying each segment of the market, no single party could possibly exert control over the entire system. And consumers could continuously “go shopping” for coverage, forcing each organization to compete with multitudes of others for their loyalty and premium dollars.

The contrary scenario, though, is the one that currently exists, and that is becoming more and more entrenched with every large insurance acquisition and every dramatic employer decision to shift the costs of providing access to health care onto employees. Indeed, such actions provide consumers with fewer and fewer choices of payers, who in turn must choose from fewer and fewer choices of insurers.

The results? Ultimately, the economics of the industry will inevitably dictate the outcomes. Costs will continue rising, service levels will continue shrinking, and consumers will continue to be left on their own to fend for themselves.