Over the course of the last few weeks and, I presume, largely in reaction to the ongoing argument in Washington over the direction that healthcare reform will take, I’ve heard quite a few things that don’t make a great deal of sense to me about the likely actions of insurance companies given this or that reform. Among the claims of which I’m skeptical are 1) that healthcare insurance companies are raking in money hand over first and 2) that, if a healthcare insurance company leaves a given market, another will just step in to take its place.
For those who believe either of these two things, may I ask a question? How many new healthcare insurance companies do you think are being started up each year? If the business is as profitable as you say and if there’s actually an untapped opportunity there, wouldn’t you think that we’d see a lot of start-up healthcare insurance companies, eager to take advantage of the opportunity?
I think that it’s largely the opposite. I think that healthcare insurance is actually a pretty lousy business, it’s very difficult to start up a new company, and the profits are almost entirely proportional to the volume of claims paid. In other words, if healthcare insurance companies make a lot of money, it’s just because healthcare is so expensive. According to the Census Bureau, the number of healthcare insurance companies has been declining pretty steadily over the last couple of decades. Is that the way the canoes would be heading if healthcare insurance is as profitable as you think it is?
However, I’m willing to listen to evidence to the contrary. Please present your evidence. I’m ready to be convinced.
I agree with you, but to play devil’s advocate, aren’t the barriers to starting an insurance company, health or otherwise, pretty high? It seems like you’d need a huge amount of starting capital and a lot of specialist expertise. And since insurance is usually contracted for a period of time (usually a year), gaining customers is a big hurdle, particularly when customers will not want to switch providers. Speaking of which, until you get a customer base, your negotiating powers with providers is minimal so your initial costs are going to be higher than the competition.
All items that support the points I’m making, that healthcare insurance is a tough business and that if a company leaves any particular market it’s pretty unlikely that a company that isn’t already in that marketplace will step up and take its place.
Andy, a start-up would most likely come from a company already in a related industry, such as auto, home, business and life insurance companies. In high school, I file clerked at such a company that opened a small health insurance business, presumably seeking to leverage their existing client base. They have some of the same basic staff, including actuaries, and I strongly suspect that some of the work is outsourced to third-party consulting services anyway.
Profit margins in the insurance, variously listed as 2.2% to 3.3%, are still going to be too low though to attract new entrants that don’t have a client basis.
Couple of ideas. First, (my copy or TR Reid’s book is loaned out so this is from memory) several European countries have relatively small populations and hundreds of insurance companies. They are highly regulated. IIRC, some are non profit. I think this would suggest that our state of affairs is not due insurance as a product.
Next, profits are not high, but they are steady. Insurance companies can pass on rate increases. Executive pay seems linked to the size of the business rather than profits, so there is pressure to grow larger.
We have fewer banks, but they have, over the last ten years, been having record profits. You would think more people would go into banking.
All that said, you need deep pockets to break into a new state. large insurance companies pretty much dictate fees to physicians. Small companies have no leverage, so we expect full fees with no discounts from them. This BTW, is why I am unimpressed by those who say interstate competition will lower costs. I am not going to accept lower fees from some company just because it is from Idaho.
Steve
Texas opened its auto insurance market to PAYD (Pay-as-you-drive) options. So far, we have only MileMeter, which charges about 4.5 cents per mile. Since I drive only 2000/miles per year, I pay only $90 per year. GEICO wants to charge me $432 for the same coverage.
Jay Leno, with 100 cars, would be even happier. Tree-huggers love it because folks are encouraged to take the bus, bike or walk if they don’t have the “sunk costs” of a year’s worth of insurance.
Obviously, there is no “mileage” on which to base health insurance. But from my vantage point as a consumer, the insurance-company profit is NOT a big item. What are big items in the foolishness of insurance are:
1. Limited choice of healthcare providers.
2. Fraudulent claims.
3. Administrative expenses.
4. Severe age and sex discrimination.
Forget the puny profit. Running an insurance racket amounts to returning 50% on your $1bet on a spin of the roulette wheel after first taking a huge part of your bet and passing it on to old folks, sick folks, breeders, women and hypochondriacs, with the result that your $1 bid becomes a $0.50 bet returning $0.25.
Choosing to participate in insurance is real stupid for a young, healthy, single and childfree male. It is still stupid for an old, sick, married and breeding female, though much less so. Only the hypochondriac or real sick person should participate in insurance at all, but of course those folks are denied insurance.
What barriers? Serious question, but here is the thing, the incumbent insurance firm has experts. The incumbent firm is raking in money hand over fist. So why not hire the experts away from the incumbent and make a nice profit, but lower than the incumbent?
There are only a few ways around this.
1. The employees are paid so they wont want to leave.
Problem with this view is that it basically means the employees are capturing the profits, so there is no, “raking in the profits”.
2. Regulations keep the potential competitor out.
Explain this regulation to us.
3. The incumbent can credibly threaten to cut costs at the first sign of entry thus detering entry.
The notion of limit pricing is not clear-cut. Most research in this areas suggests it can happen and that the researcher would need a very intitmate knowledge of the given industry. So, for which state do you have such knowledge?
steve not-V,
One difference w/ Europe is that in the U.S. the employers are the preferred customer for health insurance. I would expect a system in which individuals were the primary market would produce more choice and possibly more competition.
PD-Yet another reason to separate insurance and employment.
Steve V- The problem for a new insurance company, as I said above, is that they have no leverage with providers. The difference between charges and what is paid is usually large. anew insurance company, until it gets a big enough customer base, will have to pay charges.
Steve
Steve,
Walmart had no leverage with suppliers when it started, but soon gained leverage in its local Arkansas market, after which it easily spread throughout the civilized world.
Insurance can work the same. Here in Texas we have MileMeter that insures cars by the mile. It is not yet available in any other state, but if it is successful here, it will no doubt spread.
WalMart needs no leverage as it offers the lowest price to consumers AND it does not have to renegotiate new prices with its suppliers when it opens in Texas. An out of state health insurance company would need to offer low prices to consumers. They then have negotiate with suppliers, that would be me. I am not going to give them any special deal unless they have a lot of patients, which will be difficult for a brand new company. Thus, they need deep pockets to sustain the initial losses until they have enough clout, ie patients, that I have to accept the same fees or lower as the other insurance companies.
Steve
Well so much for looking at the insurance company profits as the cause of the problem. That is, if this is true.