Wednesday, February 24, 2010

Quote of the Day: Government Beer?

"The latest gambit to increase government control of your life comes under the guise that private health insurance companies have been making "excessive" profits, taking advantage of their privileged economic positions. Acting like a shill for the administration, "Health Care for America Now" writes, "Simply put, the private insurance companies have secured monopolies or tight oligopolies and exercised that power to put profits ahead of patients."

What might have established the so-called monopoly and oligopoly? Why, government, of course. New York State has an impressive government regulatory structure that specifies what must be covered by your insurance policy. By law, you are restricted from shopping elsewhere for coverage. Your premiums reflect unfunded mandates dictated by the state legislature and Congress. It makes no sense to increase the power of government to restrict competition further if it is competition that helps hold down profits.

By the way, just how obscene are those profits? Economist Mark J. Perry, at the Carpe Diem blog listing of Profit Margins by Industry, shows the Health Care Plan Industry ranks #86 by profit margin (profits/revenue) at 3.3 percent and the hospital industry ranks #77 at 3.6 percent — much lower than the 25.6 percent profit margin for beer brewers. Yet the administration is not beating the drums to hold down brewery profits or to take over the industry to create Government Beer."


~Rome (N.Y.) Sentinel editorial

33 Comments:

At 2/24/2010 3:31 PM, Blogger commoncents said...

Thank You for posting! Keep up the great work!!

Common Cents
http://www.commoncts.blogspot.com

ps. Link Exchange?

 
At 2/24/2010 3:59 PM, Anonymous Foundling Father said...

What is the tax, government slice of a pint of beer? What is government slice of health insurance premium? Slice of the co-payment you make for annual examination? Our rulers want higher health fees to translate into higher slice for tax? Have they inflated our cost of aspirin by discouraging competition?

U B Judge
!

 
At 2/24/2010 4:12 PM, Anonymous morganovich said...

why do i have this overwhelming sense that "government beer" would cost $8 a can and taste like puddle water?

 
At 2/24/2010 4:44 PM, Anonymous Lyle said...

Actually in many states hard liquor can only be purchased from state liquor stores. (If I recall correctly it at least used to be that way in MI). The booze industry is unique in that the 21st amendment kicks the federal government completely out of the regulation of sales and distribution of booze. (21 repealed prohibition).

 
At 2/24/2010 4:44 PM, Blogger W.E. Heasley said...

“…….Health Care Plan Industry ranks #86 by profit margin (profits/revenue) at 3.3 percent …..”

Yes, the empirical evidence is that health insurance is marginally profitable. A “notion” to further a political position is that they are excessively profitable.

An excellent example of the marginal profitability of health insurance was the $1 billion dollar acquisition of Prudential HealthCare by Aetna in 1999. If memory serves, Prudential was earning 3% on Prudential HealthCare and decided they could allocate the $1 billion elsewhere and enjoy a higher return will less hassle.

 
At 2/24/2010 4:50 PM, Blogger W.E. Heasley said...

morganovich said...

“why do i have this overwhelming sense that "government beer" would cost $8 a can and taste like puddle water?”

Good one Morganovich!

$8 might be too low as surely the cans/bottles will come with airbags, an instructional video, and complete haz-mat equipment.

Plus the hours and hours of government forms you would have to fill out in order to buy a six pack!

 
At 2/24/2010 4:51 PM, Anonymous Anonymous said...

Here is an extensive cross state study of health insurance competition written by a Professor in the Kellogg School at Northwestern University.

Here's the link:
http://www.kellogg.northwestern.edu/academic/hema/research/papers/Dafny_AreHealthInsuranceMarketsCompetitve.pdf

The conclusion is that there is evidence of a lack of competition in state health care insurance markets. She's an expert in the area, and has presented her paper to the Antitrust Division of the US DOJ as part of their economist series.

Go drink your beer, and I won't confuse you with the facts which won't confirm your biases.

 
At 2/24/2010 4:57 PM, Anonymous Anonymous said...

If the link did not come through, google Kellogg Professor Lemore Dafney's paper presented at NBER entitled "Are Health Insurance Markets Competitive?"

 
At 2/24/2010 5:15 PM, Anonymous Anonymous said...

Here is a summary of Dafney's work in a NBER source:

In the United States, more than 67 percent of individuals with health insurance coverage purchase private insurance. Unfortunately, because data on private insurance are complex and difficult to obtain, more researchers have focused their attention on public insurance than on private markets. However, in Are Health Insurance Markets Competitive? (NBER Working Paper No. 14572), author Leemore Dafny sheds some light on private markets by studying the relationship between health insurance pricing and the profits of firms purchasing insurance for their workers. Using data on “fully insured” health plans offered to employees of 184 publicly-held firms in over 100 geographic markets in the United States for the years 1998 to 2005, she finds that increases in company profits are associated with increases in health insurance premiums, but only in geographic markets served by fewer than ten major insurance carriers. In the most concentrated markets – those with six or fewer carriers -- a 10 percent increase in company profits is associated with a 1.2 percent increase in health insurance premiums. These results control for various attributes of the employee pool, such as family size, gender, and age, and for a variety of plan characteristics.

Further analysis suggests that in order to get lower rates, employers must be willing to change health plans. A plan switch is a “tough sell” in good times because employees must identify in-network providers, transfer medical records, and figure out the claims reimbursement system. The data reveal that employers are “especially reluctant to drop health plans when profitable, a finding that supports the hypothesis that profits act to raise employers’ switching costs.”

Given the consolidation of insurers during the study period, Dafny concludes that healthcare insurers are exercising market power in an increasing number of geographic areas. Therefore, research into the extent to which uncompetitive markets are contributing to higher healthcare costs would help to inform the public debate over healthcare reform.

 
At 2/24/2010 5:20 PM, Anonymous Anonymous said...

The ungated abstract of Dafny's NBER paper reads:

Little is known about the competitiveness of the private health insurance industry, despite its large and growing
role in U.S. healthcare. Data is extremely difficult to obtain because health insurance contracts are complex,
renegotiated annually, and not subject to reporting requirements. This study explores competitive behavior in
local geographic markets by making use of a privately-gathered national database of insurance contracts agreed
upon by a sample of large, multisite employers. I search for evidence of direct price discrimination by
examining whether insurers successfully charge higher premiums to more profitable firms. I find they do, and
the results are robust to specifications that rely only on shocks to the profits of given company over time and
thus use no cross-firm variation. Moreover, the practice is strongest in markets with few insurers. Specifically,
I find a multisite firm with a 10-percentage-point increase in profit margins will subsequently pay 1.6 percent
more for health insurance, but only at sites served by 6 or fewer major carriers. This evidence of direct price
discrimination suggests that, at least in some markets, insurance carriers possess and exercise market power.

 
At 2/24/2010 5:40 PM, Blogger W.E. Heasley said...

Anonymous said...

“Here is an extensive cross state study of health insurance competition written by a Professor in the Kellogg School at Northwestern University.”

“The conclusion is that there is evidence of a lack of competition in state health care insurance markets. She's an expert in the area, and has presented her paper to the Antitrust Division of the US DOJ as part of their economist series.”

That’s a very nice research paper. You refer to author, Leemore Dafney, as an “expert”. Unfortunately, Leemore Dafny is an Assistant Professor of Management and Strategy. Opps!

 
At 2/24/2010 5:52 PM, Anonymous Benny The Man said...

Some 50-year-old guy, covered in today's Los Angeles Times, had his premiums raised to $2500 a month, from $1800, in one year.
He has cancer. He had coverage--but his liver cancer is long-term, so the rates keep escalating.
There is more to the story--his insurer declining coverage for certain treatments etc.
I am not sure about the private-sector and health care.
There are some issues--pollution comes to mind--where the private sector is not the solution.
We have witnessed a federal government triumph in the defesne sector. Not a dime is wasted ever, according to the Republican Party.
Maybe a National Health Care Corps?

 
At 2/24/2010 6:30 PM, Anonymous Anonymous said...

Dafny has a Ph.D from MIT, has written extensively on insurance, and her paper is of NBER quality. In addition, she is analytical, and her papers have been accepted by AER.

You got a problem with that, or just the conclusion.

 
At 2/24/2010 6:33 PM, Anonymous Anonymous said...

@Heasly, I see that you have a BS and are an insurance underwriter.

I suppose that explains why you are so confident that the health insurance industry is competitive.

 
At 2/24/2010 6:45 PM, Blogger OA said...

Anonymous said...
...
The conclusion is that there is evidence of a lack of competition in state health care insurance markets. She's an expert in the area, and has presented her paper to the Antitrust Division of the US DOJ as part of their economist series.



Did you not get the gist of the opening editorial that the lack of competition is a government inflicted situation?

If competition really is a goal then why such resistance to repealing the laws that actually restrict interstate sale of health insurance?

I saw one person defending restrictions on interstate purchasing of health insurance by saying if New Yorker's bought insurance outside of New York, they'd lose the "protections" of all the things that NY mandates. Of course the "protections" are really mandated coverages that many wouldn't chose to pay for.

But, the reality is, even if all insurers met those individual state standards, there very likely would be a decrease in premiums.

Take the example of car insurance. All out of state insurers have to meet individual state guidelines, and yet there is tremendous variation in premiums anyway. How many people actually have car insurance from an insurer based in their state?

 
At 2/24/2010 6:46 PM, Anonymous Anonymous said...

Here is Dafny's background:



Leemore Dafny

Assistant Professor of Management and Strategy
Kellogg School of Management
Faculty Associate, Institute for Policy Research
Northwestern University
Ph.D., Economics, Massachusetts Institute of
Technology, 2001


Leemore Dafny is assistant professor of management and strategy at Northwestern's Kellogg School of Management. Trained as an economist, Dafny uses econometric methods to investigate the impact of public health insurance on healthcare costs and expenditures and to study competition in healthcare markets. Using nationwide data on Medicare beneficiaries, Dafny has examined the impact of Medicare pricing on the quantity and quality of inpatient admissions. She has also explored the strategic behavior of hospitals in surgical fields, finding evidence that hospitals may acquire additional experience in certain surgeries in order to deter entry by other providers. Currently, Dafny is investigating the effects of quality reporting on the Medicare HMO market, as well as exploring the impacts of hospital mergers on inpatient prices. Dafny is also a Faculty Research Fellow of the National Bureau of Economic Research in Cambridge, Mass.

 
At 2/24/2010 6:53 PM, Anonymous Anonymous said...

@OA, I am in favor of interstate sales of insurance, provided there is a minimum product standard. Otherwise, you get the South Dakota problem: states race to offer the lowest product called "insurance" which may not be insurance, so that they get more premium dollars in their state. This is a legitimate problem. Unfortunately ,states have become captive to specialties which require that their specialty be included. If you do have a federally specified minimum standard product, I have no problem with interstate sales, so long as the state of residence of the insured will be protected by the insurance commissioner in his state; otherwise you have the problem of a policy issued, say, in Texas to a policyholder in Michigan, and the Michigan insurance commissioner will not get involved with the dispute with the Texas carrier. Texas insurance commissioner will, of course, protect Texans, but not out of staters. They don't vote. So you need to also figure out how insurance commissioners will be able to work across state lines or pass of a problem to another state insurance commissioner.

Just those details people don't talk about whe they talk about interstate sales.

They're hoping you go for the label and not the substance.

This is not a simple issue, unless someone is a simpleton.

 
At 2/24/2010 7:21 PM, Blogger W.E. Heasley said...

Anonymous said...

“@Heasly, I see that you have a BS and are an insurance underwriter.

I suppose that explains why you are so confident that the health insurance industry is competitive.”

Sorry anonymous, its BS cum laude Economics with an undergraduate minor in general insurance as well as a Chartered Life Underwriter degree from the American College, Huebner School of Economics. 31 years insurance industry experience is a tad bit helpful too. Not an underwriter, am an insurance broker. We specialize in mid-market commercial insurance.

Now that we understand one another, there is an error at the beginning of Dafney’s conclusion. She states 35% is the share of private health insurance in the U.S.. The statistic is wrong.

The statistic is used over and over in arguments. The statistic’s error is based on he comparison of all private insurance against all public expenditures. But the
comparison has to be all private expenditures against all public expenditures, or its all private insurance against all public insurance. The comparison can not be all private insurance against all public expenditures which yields the 35% statistic.

Private insurance must include all self insured plans and people who elect to self insure. The percentage then becomes 54%.

Plus she doesn’t really look at the state mandates as causing oligopolies. In other words, government intervention is causing the lack of competition.

 
At 2/24/2010 8:01 PM, Anonymous Anonymous said...

@Heasly,
You state: "Private insurance must include all self insured plans and people who elect to self insure. The percentage then becomes 54%."

I disagree. Private insurance is a risk bearing product offered by the insurer for a premium; self insurance is the employer assuming the risk, and is not sold to third parties. One is sold in the market to third parties, the other is self-insurance, ie, not insurance.

By way of background, I'm an antitrust lawyer, have represented insurance carriers in antitrust cases, both mutual insurance, private insurance, and HMOs. I have reprented them in merger investigations, price fixing cases--and in all those cases, there is a difference between indemnity and self insurance products described in the way I have described it.

The logic of it is based on the premise of the market and the premise of a firm: if a carrier restricts output, premiums risk. There is no counterpart for self insurance since it is not offering the product to third parties, but is only an employer offering coverage to its employees.

If you want to go into this in more detail, I suggest you google for the Antitrust Division study of the insurance markets in 1976, check out Hovenkamp's treatise on antitrust and insurance.

Dafny's approach is totally, totally in the mainstream and the way this is analyzed by industrial organization economists.

 
At 2/24/2010 8:23 PM, Blogger W.E. Heasley said...

Anonymous:

Ahh, McCarran-Ferguson is your real quest. You flushed your own self out.

Or do you want to talk United States v. South-Eastern Underwrites Ass'n.

Sowell might argue with you, from the beginning of your comments, that you are merely using the "expert" argument.

 
At 2/24/2010 8:23 PM, Anonymous Anonymous said...

@Heasly, To further explain why self insurance is not generally included in the market, you have to ask the question: is there a segment that cannot self insure, and, if there is, who does that person turn to for a source of supply (that, by the way, is the definition of a market). Small businesses cannot self insure--their number of employees is not large enough ; so, they turn to their only alternative, insurance, not self insurance. Because these products are not interchangeable for use within that class, they constitute separate products, and hence, separate markets. I would not dispute that, at the boundary, inframarginal firms might have a choice going both ways--but only at the boundary.

 
At 2/24/2010 8:27 PM, Blogger W.E. Heasley said...

Anonymous

You mean at the "margin".

 
At 2/24/2010 8:28 PM, Anonymous Anonymous said...

@Heasly, "Flused myself out."

What does McCarran have to do with the price of pickles in January.

We are talking about Dafny's research on competition healthcare.

If you want to change the subject, fine.

I'm not a fan of McCarran. I think it will be ultimately repealed as part of a pact to create interstate insurance since one state's insurance commissioner cannot regulate outside of its state a policy issued in its state, and thus, the precondition that the policy "be regulated by state law" would not be met, and hence the McCarran requirement for exemption would not be met either.

 
At 2/24/2010 8:32 PM, Blogger W.E. Heasley said...

Anonymous:

Go this this link. Be sure to scroll down to the second chart as its semi hidden.

http://www.cahc.net/PieChartSourcesExpenditures2007[1].pdf

Now try the math.

 
At 2/24/2010 8:38 PM, Blogger W.E. Heasley said...

Anonymous:

Not changing subject. Too much enjoying you arguing outside your field of expertise.

However, lets agree to disagree as we are hogging to comment section of this blog.

 
At 2/24/2010 8:42 PM, Anonymous Anonymous said...

@Heasly, the pdf you directed me to is one showing how the healthcare dollar is spent.

It doesn't speak to the competitiveness of healthcare insurance.

I do know that the CEOs comp of United healthcare was high: from WIKI:

McGuire's compensation became controversial again on May 21, 2009, when Elizabeth Edwards, speaking on The Daily Show, used it to support her argument for a public alternative to commercial insurance[18]. Edwards stressed the importance of restoring competition in health insurance markets noting that at one point, "the President of United Health made so much money, that one of every $700 that was spent in this country on health care went to pay him":

Estimates of McGuire's 2005 compensation range from $59,625,444 [19] to $124.8 million[20], and the revenue of United Health Care was then $71 billion. It has therefore been suggested that Mrs Edwards may have meant to say that one of every $700 that was spent on United Health Care premiums went to pay McGuire.

 
At 2/24/2010 9:10 PM, Blogger James Fraasch said...

Nail on the head, Mark! You hit the nail on the head.

Nice job.

James

 
At 2/24/2010 9:55 PM, Blogger randian said...

I am in favor of interstate sales of insurance, provided there is a minimum product standard.

Ah, the old "race to the bottom" fallacy.

 
At 2/24/2010 10:07 PM, Anonymous Anonymous said...

@Randian, I am so grateful that you believe politicians would not race to the bottom in order to get insurance premium income in their state so they could charge a premium tax on it.

Refreshing to see that people believe in government so strongly that they would never expect states to compete in weakening their laws to attract businesses they can tax.

Ever look at SDak credit card laws and why credit card cos. incorporate there?

It is so refershing to see people confident in government and the ability of business to work with it.

 
At 2/25/2010 3:46 AM, Blogger PeakTrader said...

The article states: "It makes no sense to increase the power of government to restrict competition further if it is competition that helps hold down profits."

Actually, competition reduces costs and prices through efficiencies and may increase profits.

Government should have a limited role, e.g. provide information, tax growth, prosecute criminals, etc.

 
At 2/25/2010 8:30 AM, Anonymous Anonymous said...

when you sign up for an individual health plan, say with blueshield, you don't get to sign up as a part of giant risk pool of everybody else in the individual plan under blueShield. you'd think so because they want you to believe that you are in this giant pool....

no. instead, you are put into a smaller group where the sick have the reason to stay but the healthy has the freedom to come and go.

the result? the concentration of the sick gets higher and the premiums go up. that leads to more healthies leaving the group for another one. a snowball effect.

that kind of shenanigans are what the government RUN healthcare will stop.

you have no idea how crappy the system is until you become one of those "uninsurables" who are stuck in a group.

 
At 2/25/2010 12:36 PM, Blogger OA said...

Anonymous said...
...
that kind of shenanigans are what the government RUN healthcare will stop.


This conclusion is ridiculous. You yourself claim:
"..the result? the concentration of the sick gets higher and the premiums go up. that leads to more healthies leaving the group for another one. a snowball effect."

Yet somehow the equivalent situation where the fines for not having insurance are lower than the premiums, and where people can't be denied for pre-existing conditions won't lead to that snowball effect.

Sorry, that will in fact be what happens. The chronically sick will continue to stay in the pool. And those with an option - pay the much smaller fine, will leave. Since they can just come right back in as soon as they really need coverage. The result is higher premiums and the costs are spread among fewer low cost participants.

But perhaps you literally mean "the government RUN" system whereby they control everything. Since no bills are currently around doing that, perhaps you know something the rest of us don't.

 
At 2/25/2010 1:03 PM, Blogger OA said...

@Randian, I am so grateful that you believe politicians would not race to the bottom in order to get insurance premium income in their state so they could charge a premium tax on it.


Took me a day to figure out what you were trying to say. If I'm right, what you're saying is the insurers will cluster in some insurer friendly states and stick it to consumers in other states. As I guess South Dakota credit card companies are/were doing.

If so, I don't understand the concern. I buy car insurance from a company in Texas and motorcycle insurance from a company in Illinois or maybe Minnesota. Can't remember and I don't care because they are subject to the laws of the state of California. They have to meet the financial, coverage, and other requirements of California. Or they can't sell insurance here.

Any serious issues and the California Insurance Commissioner can actually kick them out of the state. It's happened before. In some cases, California was a PITA about some things and insurers decided to pull out of the state on their own. Of course most of those times consumers were pissed at the insurance commissioner.

Why would health insurance be any different than auto, business, or life insurance? For that matter, I buy things like shampoo and soap that are made in other states. I hope they're not hiding behind shampoo protective states where the politicians are racing to attract all that shampoo money.

 

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