Insurers aren't to blame for high health care costs.

Commentary about business and finance.
April 30 2008 4:25 PM

Stop Blaming the Insurers

It's not them. It's us. Exposing three myths about the costs of private health insurance.

(Continued from Page 1)

But guess what? Take out the cuts in costs that patients pay themselves, and, in fact, the plans cost 3 percent less. So in a typical state like Minnesota, where standard Medicare runs the government $666 a month for each beneficiary, the government may indeed pay about $725, but the insurer will get only $650 of that, while the member gets cuts in out-of-pocket costs of $75 a month, or about $900 a year.

(You can see a more detailed analysis in this Congressional Budget Office report.)

This isn't the end of the story. It turns out that seniors, like just about everyone else, prefer the ordinary Medicare model—which let them see any participating doctor—to an HMO. So Medicare Advantage added "fee for service" plans, private plans that offer flexibility—and still include the incentives. (Does this undercut the original point of the program? You bet.)

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These plans do cost 9 percent more, even after taking into account the lower deductibles and co-payments. But be careful about jumping on this number. Here's why: When you eliminate co-payments and lower deductibles, people go to the doctor a lot more often. According to the Government Accountability Office, seniors with Medigap coverage may cost the government as much as 25 percent more than those without. When you take that into account, it actually might be surprising that Medicare Advantage isn't still more expensive.

None of this means that the Medicare Advantage program is cost-efficient. The bottom line, though, is that its costs come not from insurance company inefficiency or profiteering, but from the extra benefits shoehorned into it.

Myth No. 3: The concentration of power in a few large insurers raises health care costs.

Politicians and doctors' groups blame the mergers of many smaller insurance companies into a few behemoths for rapidly increasing premiums. Big insurance mergers have been vigorously opposed by the politicians in California who fought against the huge Anthem-Wellpoint merger, and in New York. In Nevada, Gov. Jim Gibbons has said a merger of two big insurers would "take money out of the pockets of consumers and physicians." The American Medical Association has put what it calls "anti-trust reform" among the top items on its agenda.

We should be wary of mergers driving up the premiums that insurers can charge. But that fear is not the real reason why the American Medical Association has vociferously lobbied to put the brakes on mergers. That reason is the other, bigger effect of consolidation: It lowers the reimbursement rates that insurers give to doctors and hospitals. The hospital you go to and the doctor you see face to face might be more sympathetic than the health insurers, but they are a much larger part of the health care cost equation.

How big is this effect? One measure: Reimbursement rates from major insurers in Pennsylvania for some procedures have fallen to just 85 percent of the already low Medicare rates. And what makes it even worse for doctors (and, yes, potentially better for health care costs) is that insurers' contracts often have a "most favored rates" clause. If one huge insurance company can squeeze hospitals for better prices, then others are entitled to the same deal.

Whether, in fact, doctors and hospitals are unfairly pressed by giant insurance companies is a debate that may be worth having. And maybe the insurance companies' power should be reduced. But that would lead to higher, not lower, costs.

Diagnosis

Patient, heal thyself. It's not insurers that push expensive drugs, long-shot end-of-life treatments, and redundant procedures. It's customers who ask for them. And mainly doctors and hospitals who profit. How to deal with those issues is a question that will affect the health care bottom line more than whether it's the government or private companies that provide insurance. Too bad it's one we have hardly even started to answer.

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