Taking Our Medicine
The bad economics of switching health-care plans.
In the long-simmering argument over what's wrong with American health care, recent polls show that many people blame our market-based system of private health insurance. Private insurance companies are faulted for, among other things, failing to do enough to prevent disease. They have no incentive to do so, argue advocates for reform, ranging from Michael Moore in Sicko to some of the current presidential candidates. And yet if preventive measures today result in savings on treatment tomorrow, then what's good medicine should also be good business.
Diabetes management is a case in point. If they get help early on in managing blood-sugar levels, diabetics can stave off later medical complications that may result in expensive hospital stays. Yet many of these preventive measures aren't covered or encouraged by insurers. Instead, patients are forced to haggle over reimbursement for insulin pumps, and most are rationed only four test strips per day to monitor their blood sugar (sometimes enough, but often not). If better access to insulin pumps and blood-sugar monitoring will save money in the long run, why are insurers so miserly with their diabetes customers?
A recent study (not yet published) by researchers from Case Western Reserve and Carnegie Mellon University explains that the culprit in poor diabetes management—and the lack of preventive care in general—may be the very high rate at which Americans switch among insurance plans. It takes about a decade for insurers to recoup their investment in early diabetes treatment, and by then odds are that their customer has moved on to another health plan.Alas, a lot of this turnover may be built in to the way Americans get health insurance. And it's the doing not of individual patients so much as their employers, who are always on the lookout to switch plans for lower-cost coverage.
How often do Americans switch plans? Using data from the Community Tracking Study, a national household survey on health-care delivery, the authors estimate that 20 percent of policyholders switch insurers each year. Based on more-detailed data from a large regional insurer, they calculate that annual turnover may run as high as 30 percent, far too high to make back the cost of pre-emptive diabetes care, or subsidized gym memberships, or other front-loaded investments in good health.
High turnover of insurance plans isn't news to health-care providers. With coverage tied to an employer (or a spouse's employer), every time someone gets married, divorced, or moves to a new job, odds are he'll switch to a new insurance plan. But the five economists who conducted the new study show that this accounts for only half of all turnover—a surprisingly small share. The rest comes from entire employer groups switching among insurers.
Explaining the promiscuous relationship between employers and their health insurance providers presents a challenge to economic theory. Lots of insurance companies are out there vying for employers' business, and in that competitive economic landscape we would expect the "law of one price" to prevail. That is, all insurance companies should provide the same low-priced health coverage. If prices go up, insurers would be expected to undercut one another in an attempt to steal customers, driving prices back down.
Ray Fisman is the Lambert Family professor of social enterprise and director of the Social Enterprise Program at the Columbia Business School. He is the co-author, with Tim Sullivan, of The Org: The Underlying Logic of the Office. Follow him on Twitter.
Photograph of diabetic checking blood sugar by Mark Harmel/Getty.