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A difficult graph for health-care reformers


For people, like, well, me, who think that the health insurance exchanges have a real shot at lowering health-care costs throughout the system, the graph above is difficult. For conservatives who believe that the key to constraining health-care costs is to encourage competition between insurers and give individuals the opportunity to choose, the graph above is difficult. Because what the graph above shows is that neither of those strategies has worked terribly well, at least as of yet.

The graph above tracks premium growth in three markets: the employer market, the Federal Employee Health Benefits Programs, and the California Public Employees' Retirement System . The latter two are essentially models for the exchanges. They're regulated markets in which various insurers compete for a relatively large pool of customers who are able to choose among their offerings. And they have not, in general, held costs down much better than the employer-based market at large.

If you ask health-care policy wonks about this, you get a lot of different answers, many of them convincing. For one thing, these markets aren't that big. But then, the state-based exchanges won't be that big, either. For another, these markets aren't aggressively managed, and the purchasers aren't very selective about which insurers can enter the pool. But then, it's not clear the exchanges will be much better.

The big difference that could come over time is size. If the exchanges grow to be quite large, and most workers end up purchasing health-care insurance inside of them, that will make the insurance market less fractured, which will give insurers more power to bargain with providers, and it will bring workers closer to the true cost of their health care, which will give them more of an incentive to shop aggressively for high-value plans. But that presupposes size, and right now, there are a lot of reasons to believe the size of the exchanges will be very limited.

By Ezra Klein  |  October 22, 2009; 11:55 AM ET
Categories:  Health Reform  
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Ruh roh... could it be that competition among private insurers who have very little clout with providers won't work? Which begs the question: If private insurers have no clout, who needs them?

The case for the public option makes itself once again.

Posted by: bmull | October 22, 2009 12:15 PM | Report abuse

Maybe we should stop pretending that the insurers are the problem instead of the providers.

Posted by: jdevo | October 22, 2009 12:19 PM | Report abuse



in essence selling insurance over state lines is a nice market driven way to restrain costs over the short term, a public option is a nice government driven way to restrain costs over the short term but the only way to TRULY restrain costs is to restrain what providers make and what services they can provide and how often they can provide them. Now you can do this by telling providers an amount they're capped at to make for a specific procedure (CANADA'S way) or other models ways but at some point people need to realize they're not going to be able to go wherever they want, get whatever they want and get it for free.

Posted by: visionbrkr | October 22, 2009 12:42 PM | Report abuse

How do these compare to growth in the individual market? Looks like these haven't done any better than the employer market, but if the new exchanges can get the individual system on par with any of those that'd be a major accomplishment, no?

Posted by: kitzall | October 22, 2009 12:55 PM | Report abuse

Why do “healthcare economists” spend so little time discussing supply and demand?

Supply – regulation (i.e. licensing, CON) limits the supply of medical services.

Demand – healthcare is a superior good, for every 1% increase in income, demand for healthcare services increases by 1.6% (estimate from Robert Fogel).

As long as regulation artificially restricts the supply of healthcare services and incomes continue to rise, healthcare costs are going to increase. Even if the government decides to take over the ENTIRE system (i.e. NHS) people will spend their OWN money to increase their healthcare consumption leaving total expenditures unchanged.

BTW, why does anyone care how much money private individuals spend on their own healthcare?

Posted by: kingstu01 | October 22, 2009 12:58 PM | Report abuse

Besides general agreement with visionbrkr...eventually getting all of what we want whenever we want it will have to stop, I have two comments on this graph:

--are the increases gross or net? The employer marketplace typically does quite a bit to hold down increases (worth approx 2% a year....does FEHBP and CALPERS make similar changes or not? Not sure we can assume they do, especially with FEHBP

--if you look at the footnotes, employer data is based on a family of 4 with no retirees. This should be a weighted average across all enrollment categories. CALPERS is non-Medicare plans which would imply they are including early retirees (an expensive bunch)

Posted by: scott1959 | October 22, 2009 1:35 PM | Report abuse

bmull, isn't the "ruh roh" that the case for single payer is being made once again, rather than the case for a public option that competes with private options?

Posted by: JonathanTE | October 22, 2009 1:39 PM | Report abuse

Veteran health care economists (as opposed to health care policy wonks) have said over and over that "free market competiton" has little relevance to health care costs.

As Uwe Reinhardt noted in a recent segment of This American Life, the more insurers there are in an area, the less influence they have on costs because they negotiate with suppliers from a weaker base.

"Consumer-driven" initiatives represent another delusion that cannot make any fundamental difference. Fact: costs in health care are primarily (not exclusively, but primarily) supply driven. Hospitals, practitioners and pharmaceutical companies will charge what they want to satisfy their own needs -- whether it is insurance billing staff, VIP suites, or in-house equipment -- and health care consumers will pay it. If we want to control costs, we have to organize to avoid oversupply of costly elements.

No country in the world has built a successful health care policy relying on competition among payers to control costs...NOT ONE. Yet the current proposals are all built around finding ways to pour more money into that discredited path. Not only that, they are purposely designed to postpone the realization of the folly for another decade.

We need to stop equating health insurance with coverage or care and get down to constructing a financing model that has some kind of long-term sustainability.

Posted by: Athena_news | October 22, 2009 1:41 PM | Report abuse

Health care costs in this country will probably continue to rise far greater than the general inflation rate, the phony government or true figure until the following are achieved.

1) Either a strong public option or single payer system.

2) Tort reform.

3) Tens of millions of people making and being encouraged to become, stay more healthy.

4) Restraining the greed of many health insurance and drug companies.

Posted by: Aprogressiveindependent | October 22, 2009 1:58 PM | Report abuse

I agree with the last two comments. Ezra's mania about the exchanges is founded on his apparent faith in the free markets, that competition will drive down health-care costs. It hasn't and won't. As athena notes, the for-profit health care industry is going to charge what it charges. Either through intense regulation of the private market on the Dutch or Swiss model, or through single payer, we through our government should have the ability to say that health care is a social good and that we're not going to submit meekly to the Market God. Why this lesson, which every freaking Westerm industrialized country except ours has learned, is SO difficult for big brains like Ezra, truly gob-smacks me.

Posted by: redscott | October 22, 2009 3:28 PM | Report abuse

"Maybe we should stop pretending that the insurers are the problem instead of the providers"

If you look at the other graphs on this same website you see cost increases, but the biggest occured starting in the late 1990s when the dreaded managed care bit the dust.

It is about providers being pressed to manage, i.e. deny care.

Posted by: RedBird27 | October 22, 2009 4:59 PM | Report abuse

The transaction cost of choosing a plan is not 0. How many people in those exchanges actually change their plan from one year to the next?

If the cost of studying insurance coverage booklets and them comparing plans is very high then people would be price inelastic.

Posted by: ideallydc | October 22, 2009 5:56 PM | Report abuse

You spend every day immersed in this...
You are of above average intelligence...
You are supposedly of a liberal or progressive bent...

But how is it, as other commenters have commented that this is somehow a surprise. I have started a healthcare blog in part because of the sickening superficiality of some of the comments that I see here and on other healthcare blogs that seem to have not READ THE LITERATURE and studied how it's done in other countries.

Competition in healthcare does not bring down costs for any length of time...government management of the system, standardized payment schemes, publicly funded preventative health care...those are what control costs.

Maybe you are resisting the obvious because it sounds boring to you...I just don't know.

Posted by: michaelterra | October 22, 2009 7:23 PM | Report abuse

I had posted this and it appeared on the page, but now is deleted. In the hope that this was a glitch and not deliberate, I'll post again:

To the extent that there are benefits of an exchange, they don't necessarily show up in year-to-year changes in cost. If the exchange is well-run, one financial benefit can be in a lower base cost, primarily through the reduction or elimination of broker fees. That's only a reduction of about 1-2%, assuming the exchange doesn't have high administrative costs of its own that swallow those savings. Another benefit of an exchange is to make it easier for people to compare and buy insurance policies, which is a consumer benefit but doesn't necessarily translate into significant savings. Finally, if small groups are allowed to participate in the exchange it will allow them to offer multiple insurers and products to employees (which now they almost never do). That should help costs a bit, because it will reduce pressure on small employers to buy health plans with very large networks in order to make sure all their employees are happy. This way, employees that really want the larger network can buy it, while employees that want a smaller network or an EPO or HMO instead of a PPO can get that. But again, these savings could be a one-time event and need not show up in year-to-year cost trends.

Posted by: jdhalv | October 23, 2009 12:20 AM | Report abuse

athena makes an often overlooked but very important point:

"As Uwe Reinhardt noted in a recent segment of This American Life, the more insurers there are in an area, the less influence they have on costs because they negotiate with suppliers from a weaker base."

Any insurer with less than 15-20% market share has a hard time negotiating good rates (and good here is relative: a comparison with the rates that the strongest plans get).

Here's an analogy: say that in the pc business there are 6 significant manufacturers (market share greater than 5%), 2 significant suppliers of necessary processors of type A and 3 significant suppliers of necessary chips of type B. You need both A and B. Now add 4 more computer manufacturers but keep the suppliers the same. That improves rather than subtracts from the negotiating position of the suppliers.

Of course, in the real computer industry the suppliers of processors (Intel and AMD) are engaged in a highly productive competitive battle that reduces cost and improves performance every year. In the closest health care supplier comparison--hospitals-- there are very often only 2 or 3 systems in a given region competing, but as readers of this blog know they compete very differently. They build more luxurious rooms and ornate new wings and buy the latest imaging equipment (not based on improved health outcomes!) and get in bidding wars for surgeons who then have to perform by drawing in more patients for surgery. Most things a hospital does to compete better result in higher costs and are orthogonal to outcomes.

Posted by: jdhalv | October 23, 2009 12:52 AM | Report abuse

Health care is costly. Health care is also a good that we are willing to spend more on as we are more prosperous.

We also have a very chaotic health care system. Mostly individual doctors and small groups sell indivudual treatments and procedures to patients who are really not able to make competent judgements of the quality or necessity for these treatments and procedures.

At the same time doctors incomes depend on the amount of treatments sold.

Health insurance exchanges will do nothing to solve the problems of fee for service medicine. Insurers are not competent to manage and direct medical care. The change has to come from within medicine.

In the meantime the high out of pocket, "consumer driven" health plans that you and Senator Wyden seem to favor require even further refinement and strengthening of fee for service medicine. How else do you make sure that someone has met the deductible?

They may produce temporary decreases in the cost of insurance but will wed us even more firmly to the fee for service model.

Posted by: WonksAnonymous | October 23, 2009 1:52 PM | Report abuse

Is it my imagination, or are there a lot of conclusions arising out of what appears to be an incomplete analysis?

Ezra is looking at one variable – insurance premiums. However, the total cost/benefit of each system has multiple variables. For example, premiums can remain relatively constant, provided that a private insurer rejects coverage to an increasing number of people over time.

In fact, if you look at the Kaiser/HRET study the total percentage of firms (Employer-Sponsored Plans) offering health benefits went from 69% in 2000 to 60% in 2009 (, pg 11.)

I suspect FEHBP and CalPERs did not show similar rates of decline in the percentage employees covered.

Posted by: joelk73 | October 23, 2009 5:08 PM | Report abuse

Well this is kind of the core complexity of reform. The only kind of institution that can drive down costs is one that has enough market power to beat down provider prices. But patients hate that and it's not politically palatable. That's exactly where all the foreign health care "failures" -- long lines, lower tech, rationing -- come from.

This, in my opinion, has become a serious difficulty for the modern progressive focus on health reform as deficit reduction. You don't NEED to talk cost control to talk about expanded coverage, and shotgunning the two together has created a reform landscape where you have to reassure people about choice and quality while ALSO thinking about cost control.

My preferred approach would be to accept tiering in exchange for universality. Define a baseline, require physicians to take it (or make it a condition for taking other, more lucrative payers), and pay low rates -- but open the plan to everyone and have it cover the most routine medical needs. Then let the private insurance market operate above that baseline so that the current folks who are afraid of losing their privileges could always buy into gold plated coverage.

Posted by: NS12345 | October 27, 2009 3:46 PM | Report abuse

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