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Do caps on profit/overhead rates for medical insurers tend to drive health care prices up instead of down?
This is an old link to a report on the White House rulemaking process:
http://thehill.com/blogs/regwatch/healthcare/28360...
The report says that the new rule provides as follows:
"The measure would implement 85-percent “medical loss ratio” requirements on Medicare Advantage plans and the Medicare Prescription Drug Benefit Program. In other words, plans that deliver services under those plans must spend at least 85 percent of their premiums on “clinical services, prescription drugs, quality improving activities, and direct benefits to beneficiaries,” according to the proposal.
"Overhead expenses and profits would be capped at 15 percent."
Sounds like a cost-cutting measure, right?
But economists will tell you that, if you ignore incentives, any coercive measure you implement will have unintended consequences. So, all insurers are incentivized to make their profits as close to 15% as possible. This means making their overhead expenses as little as possible (in terms of percentage). The easiest way to do this is to pay MORE for actual medical services. The per-transaction overhead costs generally remain the same regardless of the cost of the "direct benefit" that is being paid for.
(See below for an example.)
Let's look at a simplified example. A band-aid can cost upwards of $50 in a hospital. (I know, I recently checked an itemized bill for a hospital visit.) So the insurance looks at the band-aid. If it pays the market-value of $1.00, and the transaction overhead cost is .02, then the most it can legally make off this band-aid is 13 cents (the 15-cent maximum minus the 2-cent overhead).
Now consider letting the provider charge $50 for that same band-aid. The transaction (overhead) cost is still roughly the same, or 2 cents. But the insurance company can now make $7.48 in profit on that same band-aid and still be compliant with the ACA rule.
So the insurance company is doubly incentivized NOT to fight for lower prices: (1) higher prices mean lower overhead percentages; and (2) higer prices mean higher realized profits.
And now the ACA adds a third incentive: if premiums have to be increased to accommodate the rising costs of real medical care, those premiums will be subsidized by t
And now the ACA adds a third incentive: if premiums have to be increased to accommodate the rising costs of real medical care, those premiums will be subsidized by the Feds for those who can't afford the higher premiums. In other words, the ACA eliminates the downward pressure on prices that is usually present in a free market.
What incentives does the ACA provide that will put downward pressure on REAL medical costs (as opposed to those costs that are masked by subsidies)?
2 Answers
- KiniLv 77 years ago
In your first question, the ACA says 85% of every health care dollar paid in premiums must be spent on health care, not overhead or expenses. It does not mean insurance companies cannot make more than 15% profit.
In the second question, the government does not subsidize your premiums for more when the cost of premiums goes up. The percentage remains the same.
There is no law that tells a hospital, doctor or provider how much they can charge, only that insurance must use 85% of the insured's premiums for actual care. Doctors and providers bill insurance by a code and whatever they dont get, the patient makes up the difference. When a patient first sees a new doctor, they sign an agreement to this effect.
- AnonymousLv 77 years ago
No, they really don't affect the pricing, as most insurance companies had a profit margin of closer to 3% to 6%, well under the 'cap'.
And to the last question, the ACA - aka Obamacare - actually offers absolutely NO incentives to keep costs down. Quite the opposite - if you were designing an insurance overhaul to INCREASE prices drastically, and eliminate coverage options for a whole bunch of people, it would look exactly like Obamacare.
