In The Blogs

The Frakt Curve

| Mon Nov. 2, 2009 8:24 AM PST

You've heard of the Laffer Curve? Today we get the Frakt Curve, courtesy of Austin Frakt, who suggests that trying to increase competition in the healthcare insurance market might reduce costs, but it might not. It all depends on where we are on the curve:

[When insurer concentration is high] premiums are above the minimum possible level. Insurers are charging above the competitive premium level because they have excessive market power. In this region, higher premiums stem from higher insurer profits and/or lack of administrative efficiency....

[When insurer concentration is low] premiums are again above the minimum because insurers can’t negotiate down to the lowest possible price with providers. Providers have too much power relative to insurers and are charging prices above the competitive minimum. Insurers pass those high prices onto consumers through higher premiums. In this case, higher premiums stem from higher medical costs.

Austin's point is that to a large extent the healthcare battle is waged between insurers and providers. Since the American healthcare system relies primarily on both private providers and private insurers (and this will be true even if a public option passes), we don't necessarily get the lowest costs when one side or the other is weakened, but when the two sides are fairly equally matched. Thus, removing antitrust protection for insurers might lower costs or it might not. It all depends on where we are on the curve right now.

Alternatively, we can try to move the entire curve downward. Or we could ditch the whole thing and ask the Swedes to please design us a new healthcare system. But in the absence of either of those things, where you are on the curve dictates whether and how much you need to rein in one half of the healthcare market vs. the other.

UPDATE: Michael Hiltzik makes the case for more insurance industry competition here.

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Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

Comments

Asking the Swedes to please

Submitted by anomaly on Mon Nov. 2, 2009 8:57 AM PST.

design us a health care plan sounds a whole lot better than asking the corporate insurers to use their lobbyists to design them a health care plan for congress to approve.

On the right side

Submitted by g. powell on Mon Nov. 2, 2009 9:03 AM PST.

From what I understand, we basically have different health insurance markets in each state, and many of those markets have only two or three insurers. Therefore, it seems excessive insurer concentration is the problem in those markets, putting them on the right side of the curve -- at least according to Frakt's analysis.

I thought whole point of the public option was to break up insurer concentration, not to shift the curve downward.

Sooooo

Submitted by Al_ (not verified) on Mon Nov. 2, 2009 9:08 AM PST.

What happens when there is only one insurer - the federal government? Premiums higher or lower?

If the Federal govt were a

Submitted by g. powell on Mon Nov. 2, 2009 9:53 AM PST.

If the Federal govt were a profit-maximizing player, it would exploit its monoply powers by squeezing provider payments and hiking premiums to boost earnings. But it's not a profit maximers, so a single-payer system would be able to structure provider payments and premiums any way it sees fit to achieve policy goals, as long as it accounts for what is actually feasible.

Wasn't this already obvious?

Submitted by Mike R (not verified) on Mon Nov. 2, 2009 9:14 AM PST.

Wasn't this already obvious? It is, after all, basically the Wal-Mart model.

Ok, so health care follows similar economic laws as Wal-Mart does. What might be interesting is, how is it different? The most important distinction may be that your local care providers don't run weekly ads advertising their prices so you can make comparisons.

I don't think it's obvious

Submitted by g. powell on Mon Nov. 2, 2009 10:02 AM PST.

I don't think it's obvious at all. The analysis is a simplified abstraction and doesn't capture the whole picture, even if it does offer a perspective. Healthcare is not as simple as retail for a variety of reasons. Walmart and the healthcare system are subject to the same laws of economics, but the markets are structured entirely differently. For one, healthcare offers complicated products that often mean the difference between life and death. Walmart doesn't.

For one, healthcare offers

Submitted by Mike R (not verified) on Mon Nov. 2, 2009 1:03 PM PST.

For one, healthcare offers complicated products that often mean the difference between life and death. Walmart doesn't.

You, sir, do not appropriately appreciate the importance of a competatively priced large flat-screen TV.

ininsured medical fees are a third factor

Submitted by joel hanes (not verified) on Mon Nov. 2, 2009 9:28 AM PST.

Nowhere in the Economist article does the word "uninsured" appear.

But medical services and supplies purchased "retail" -- outside the fee structure negotiated between providers and insurers -- are critically important in any understanding of how today's broken US healthcare system fails to work.

1. They tend to be overpriced, as the providers seek to extract from captive consumers the cost of treating the indigent who cannot pay, and to subsidize the low rates negotiated with insurers. I would argue that Frakt's curve is shifted downward by this effect.

2. Our perception of "how much healthcare costs" is set by our experience of retail medical fees : before deductible, outside plan, uninsured, previous condition -- many of the insured, even the well-insured, will have to pay for some care at the retail rate, and reading and paying those bills is apparently memorable.

Even if what public option passes ?

Submitted by RobertWaldmann on Mon Nov. 2, 2009 10:30 AM PST.

Even if most people are covered by private insurance, they will have to compete with the public option for the business of people on the exchanges. One low price competitor can cancel the effects of market power even if that competitor doesn't end up with most of the clients. Similarly the public option will squeeze providers and force insurance companies to squeeze providers. Both market failures could be cured (for people on the exchanges) by a robust public option.

I also think that insurance companies and health care providers would have to charge less to prevent large employers from effectively demanding access to the exchanges.

Now a level playing field public option won't do any of this. However, your argument was general and based on the assumption that an entity with a modest market share has a modest impact on the market. That's not the way markets work.

costs

Submitted by rbe1 (not verified) on Mon Nov. 2, 2009 11:23 AM PST.

The only way to reduce costs across the board is everyone in the same risk pool, with no private insurance companies, financed by taxes.

Needs a third axis --

Submitted by B on Mon Nov. 2, 2009 1:19 PM PST.

Needs a third axis -- provider concentration. When the providers are less concentrated and the insurers are less concentrated they all compete for the patients and premiums go down.

Federal scholarships for healthcare related education. Liberal use of anti-trust laws. I don't know what else, but it doesn't seem impossible to get there.

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