Last week, I described how providers and insurers are the parties in the healthcare system that we need to lean on to start innovating in ways that actually bend the cost curve. And it would seem that they have all the incentives in the world to do this, because any innovation that they can do that lowers their cost means they are keeping more money in their pocket (assuming prices are fixed). But there are some challenges.
This week, let’s look at insurers.
Remember that total healthcare spending is a function of two things: the number of care episodes, and the cost of each of those care episodes. Insurers try to lower the cost of care episodes by covering fewer things (benefit exclusions, prior authorizations) and negotiating for lower prices, but they’re fairly limited in their control over that variable. They have more opportunity to reduce the number of care episodes by keeping people healthy (yes, it does always come back to my Healthcare Incentives Framework). If they can accomplish this, all that money they avoided paying out to providers stays in their pocket.
Brief rant: That last sentence is not strictly true. The Affordable Care Act, in an effort to prevent insurers from price gouging, included a provision that requires insurers to pay out 80% or 85% (depending on the market) of the premium money they receive to providers to pay for care, which would theoretically prevent unreasonable profits by forcing them to limit how high they can raise their prices. This seems like a great idea until you realize a few things. First, if an insurer does a great job preventing care episodes, they may end up having to pay a bunch of that money back to enrollees as rebates, so this puts a ceiling on the financial benefits of innovations that lower medical spending, thereby reducing innovation in this area. Second, small insurers don’t have the luxury of millions of covered lives over which they can spread overhead, so this has put some smaller insurers out of business, thereby concentrating the market even more than it was before. Third, the solution to a market problem is not to control prices like this, but to identify what is interfering with competitive pricing and get rid of that. Sure, there have been billions of dollars of rebates paid out, but at the cost of creating new market distortions that will further interfere with true long-term price-lowering solutions.
Anyway, here are two other reasons insurers don’t innovate more to lower the cost of care:
- Patients don’t like it: When an insurer starts getting too aggressive about trying to send people to your house or change how you live your life, this gives that insurer a bad rap. And in the absence of really good price and quality information about different insurers, people rely heavily on reputations, so it’s very important for insurers to preserve their reputations.
- The rewards for taking a big risk to innovate in ways that prevent care episodes are small: An insurer can definitely invest a lot of money trying some new program that could keep people out of hospitals, but it’s a big risk to take, so the potential rewards also have to be big. But when they start thinking about how much money the initiative will cost, the likelihood of it saving more than it costs, and the risk of them having to pay back money for rebates if they save too much money, the benefit starts to seem pretty small. Not only that, but also they can’t reassure themselves that, even if the net savings per enrollee are small, it will allow them to lower their premiums and outprice their competitors and win a larger percentage of market share. Why? Because people shopping for healthcare insurance typically have too many variables to think about, so it gets confusing and they end up assuming a lower-priced insurance plan must be cheaper because it’s covering fewer things.
All of these problems are solveable to a great extent. It requires getting rid of the ACA medical loss ratio requirement and instead getting better information to people shopping for health insurance, which would allow them to better identify higher-value insurance plans and rely less on insurer reputations in their selections.
Then, when an insurer does a great job innovating in a way that lowers the number of care episodes, that insurer will be motivated to lower their prices of their own volition and will be assured that new customers will flock to them, thus forcing other insurers to do a better job innovating themselves, and the cost-curve-bending will have begun.