Insurance Regulation Alone Won’t Solve the Problem of Healthcare Costs

May 17, 2010

Austin Frakt has a great column today at Kaiser Health News, illustrating the limits of insurance regulation as a means of bringing down the cost of health insurance. Here’s an excerpt:

Our frustration with the soaring cost of health care is like a mother upset with the increasing price of bread. When her son returns from the market with another high-priced loaf she hatches a plan. The following week, when bread costs $5 a loaf, she attempts to control the price by sending him to the market with only $4. The family spends less on bread that week, but they also don’t eat any since the boy couldn’t find a merchant willing to sell below the market price.

The next week bread is selling at $6 a loaf, and the mother tries another plan. Thinking her son lazy, she attempts to discipline him with competition. She sends her daughter with him to the market. Whichever of the two can obtain the lowest bread price will win the family’s respect. The winning price, paid by the daughter, is $7. She and the boy competed, but the additional competition on the buyer side sent the price up, not down (as one should expect).

What the mother isn’t noticing about the bread market, and many don’t recognize about health care, is that suppliers (bread sellers, health care providers) play a role in establishing prices. Regulating the price paid by buyers or the level of competition among them isn’t likely to produce the outcomes we might hope for without parallel action on the provider side of the market.

There’s a tendency for casual observers (including some policymakers) to think the problem with our healthcare system is that evil insurance companies are gouging consumers. Given that premise, it might be sensible to conclude that more vigorous competition in insurance markets would help bring down prices.

But it’s important that people, particularly policymakers, understand that the price of health insurance is not simply a function of the supply & demand or concentration in the insurance markets themselves, but also depends crucially on supply & demand and concentration in provider markets. As Frakt points out in the column (and on his blog), regulation that weakens insurers vis-à-vis providers may end up causing prices to rise rather than fall. Ultimately, we will have to grapple with how providers are paid (and how much they are paid) if we hope to rein in healthcare costs. Insurance regulation is important, but it’s a sideshow in the grand scheme of health reform.

Posted in Health Policy Comment Tags:

Comments

Leave a Reply