John Lott took a look at some of the details of Barack Obama’s arguments on health care, and decided to get into the suddenly booming business of mythbusting — or what we used to call exposing lies. One of the big whoppers in Obama’s speeches have been that only one or two insurance companies operate in some states, leading to a lack of competition and abuse by insurance companies. However, neither are true, which becomes obvious when one looks at how people get insurance within those states:
Two claims are made all the time in the health care debate: 1) that there is little competition among those providing health insurance and 2) that it is important to take the profit motive out of providing health insurance. Both are myths. It turns out that claims about too little competition are based on a misinterpretation of the data and that non-profit insurers are so abundant that the largest insurer in virtually every state is a non-profit.
You would probably never know either of these points from listening to the news. Proponents of government provided health insurance, such as President Obama, argue that such a government option is required to inject competition into the market. “Insurance companies and their allies don’t like this idea, or any that would promote greater competition,” Mr. Obama warned during a weekly Saturday radio address during the end of August. Even those who don’t support a government option are concerned about the lack of competition. “There is a serious problem with the lack of competition among insurers,” said Republican Senator Olympia Snowe of Maine. “The impact on the consumer is significant.” …
But they leave out the fact that for most people it is their employer, not the insurance companies, that pays for any bad health outcomes. The firm does so out of the company’s own pocket. The companies do what is called “self-insure” or “self-fund” their plans, and that occurs for around 55 percent of employees according to the Agency for Healthcare Research and Quality with the Department of Health and Human Services.
Take Maine, Senator Snowe’s state, as an example. There, the two largest insurance companies appear to control 88 percent of the market. And Well Point Inc. makes up most of that, with 78 percent. But what isn’t made clear is that these numbers only deal with privately insured patients who are insured by insurance companies. Slightly over half of the privately insured in Maine (52.1 percent) get their insurance through their employers who “self-insure.” These companies merely hire other companies to handle the paper work. Well Point Inc. thus really provides primary or “full” insurance to 78 percent of the market not covered by self-insurers. Doing the math gives 78 percent x (1 – 52.1%) = 37.1 percent of the total market in Maine. The second largest insurance company has only 4.8 percent of the total market.
For Alabama, instead of the “almost 90% is controlled by just one company,” as the president claims, the correct number is 36 percent. The second largest company has just 2.1 percent of the market.
Self-insuring employers face competition — each other. They compete for workers just as they do for customers. Part of the competition includes medical benefits. Employers who self-insure have the same competitive pressure that other employers do in the labor market in providing the best benefit package possible while keeping costs low.
Why don’t more people understand this? Because self-insuring employers rarely identify themselves as such. Their employees still work through insurance companies for claims and benefits but are rarely told that the insurer is only acting to manage the employer’s self-insurance program for a fee. That way, employers do not have to directly face the end-users of the insurance for disputes on benefits and claims. I worked for two employers who self-insured and didn’t realize it in either company until I had access to the profit-and-loss statements for my units. Employers like to keep that as quiet as possible, so that they can collect the premiums and assume the risk themselves — which usually helps keep their expenses low and makes their businesses more competitive.
This is part of the overall opacity between consumers and price that is the real source of the problems in the health-care industry. Not only do most people not know what the actual cost of the services provided to them are, in many cases they don’t know who’s actually paying the bills. Instead of creating more opacity, as ObamaCare would do, the real solution to this problem is to get insurance out of the health-care club business and back to indemnifying against severe losses. Congress needs to bolster health-savings accounts (HSAs) instead of eliminating them and have providers start competing openly on price as well as quality.
The problem with health care isn’t a lack of competition. It’s a lack of pricing transparency and consumer control over behavior. If we want to solve the actual problems, putting government in charge is the worst possible direction we can take. We need consumers to take charge by actually seeing the pricing and making rational decisions accordingly.