By Evan Falchuk

Gary Schwitzer links to a Business Week article that says health insurance is a very uncompetitive market.  Schwitzer notes this hasn’t gotten much attention, and wonders if it is a reason why health insurance premiums keep going up.

It is – and it isn’t.  As with most things in health care, there’s more to it than it seems.

Business Week and Schwitzer are right that the market for health insurance is not especially competitive.  Most states have one or two dominant health insurers, and a number of other much smaller players.  The smaller insurers are often a big disadvantage.  I blogged about this a couple of months ago.

But the question of the cost of health insurance is something that mostly affects small employers – the companies that employ some 55 million Americans.

As companies get bigger, they minimize their exposure to the insurance market.  Mid-sized employers (between about 500 and 2,500 employees) buy so-called “stop loss” coverage.  Under these plans, they self-insure for some of the risk, and buy coverage for unexpectedly high expenses.  It’s sort of like a high deductible plan, except it’s for the company.  That market is, in fact, highly competitive, and serves many of the 14 million Americans who work for companies of this size.

Really big companies – which employ 43 million Americans – don’t buy health insurance at all.  They hire a health plan to administer their expenses, but have completely opted out of the health insurance market.

So is the uncompetitive health insurance market driving health care premium increases?

It doesn’t help, but there here are three other things that we don’t talk enough about that are driving these increases:

1.  State coverage mandates. Each state requires that insurers who wish to sell there comply with a huge variety of coverage mandates.  In fact, there are nearly 2,000 mandates, some of which add significant costs to health insurance.  Adding new mandates is a regular activity of state governments, based on the political clout of patient groups, pharmaceutical companies and others.  State governments have had an important role to play in driving premium increases.

2.  Guarantee issue requirements. The other thing some states have done is outlaw medical underwriting.  This means that if an uninsured person gets diagnosed with an illness, he can just go out and buy an insurance policy and, for the cost of an annual premium, get all the care he needs.  He can even cancel the policy after he’s done being treated, and buy one again if he gets sick again.  There may be valid public policy reasons to make health insurance guarantee-issue.  But the reality is that insurers have to add in additional premium to account for the fact that their risk pool includes in it much more costly individuals than otherwise would.  There is no free lunch.

3.  Other cost-shifting.  Studies show that tens of billions of dollars a year of uncompensated health care to the uninsured is provided by medical providers.  They try to offset these costs by negotiating higher payment rates from private insurers.  The same is true for government-funded programs.  As these programs have attempted to control costs by simply paying less, providers have tried to recoup those reductions through higher fees to health plans.  In each case, the ultimate cost is passed on to the consumer.  Some groups think this kind of cost-shifting adds 5-10% to annual premium rates.

There are, of course, lots of other reasons for the rapidly increasing health insurance rates.  These are few of the less discussed that we ought to talk about more.