I'd Prefer Insurers

Someone's Got to Stop Medical Price Gouging

For a long time I've propounded the theory that the main thing wrong with the economics of American health care is that insurers are too weak. Somebody has to discipline providers. They have amply proven they will not discipline themselves. It's unrealistic to expect patients to apply the discipline. I'd prefer not to have government do it. That leaves the insurers.

That's an unpopular view, because insurers themselves are unpopular. It's the insurers who deny people coverage for pre-existing conditions or apply lifetime coverage limits. But why do they do it? They do it because they confront costs they have no power to control. Lacking sufficient market power to discipline providers, they instead turn their power against their members - patients.

Think of healthcare economics as a three-party negotiation: patients-insurers-providers. (Providers here means not doctors and nurses, but the larger hospital corporations that increasingly employ those doctors and nurses.) Right now, the market empowers them in roughly this order: providers are strongest, patients are weakest, insurers are in between - and so generally prefer squeezing their patients to tussling with the providers.

Compare that experience to, say, retailing. There the rank order of power goes: consumers, big retailer, supplier. Suppliers hate Wal-Mart, but consumers don't.

The New York Times today has a shocking story detailing how the providers abuse their power over insurers.

A close look at the finances of Bayonne Medical Center sheds light on how hospital pricing at the extremes may financially benefit an institution. The practices at Bayonne Medical also highlight a new financial strategy used by a small number of hospitals to increase their profits by “going out of network” — severing ties, and hence contractual agreements that limit reimbursement rates, with large private insurers. … an out-of-network hospital can bill the patient’s insurer at essentially whatever rate it cares to set. While the insurers can negotiate with the hospital, they generally end up paying more than they would have under a contractual agreement.

Can you imagine how Wal-Mart would react to a paper towel company that tried a trick like that?

When providers gouge, somebody must stop them. I see only two candidates: government or insurers. I vote for the latter. But if not the latter, sooner or later it must be the former.

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David Frum

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