By Leemore S. Dafny
Harvard Business School, American Economic Journal: Economic Policy, February 2019
There is limited empirical evidence about the impact of for-profit health insurers on various outcomes. I study the effects of conversions to for-profit status by Blue Cross and Blue Shield (BCBS) affiliates in 11 states, spanning 28 geographic markets. I find both the BCBS affiliate and its rivals increased premiums following conversions in markets where the converting affiliate had substantial market share. Medicaid enrollment rates also increased in these markets, a pattern consistent with “crowd in” of families who were formerly privately insured. The results suggest for-profit insurers are likelier than not-for-profit insurers to exercise market power when they possess it.
From the Discussion and Conclusions
Looping back to the theoretical models of NFP (not-for-profit) and FP (for-profit) health care organizations, the findings are consistent with models in which NFPs prioritize enrollment over profits (equivalently, models in which FPs prioritize profits over enrollment). While theoretically this difference in emphasis might not manifest in higher premiums or lower quality because FPs could be more efficient and find it optimal to maintain substantially the same premiums and quality as NFPs (and still reap higher profits via lower operating costs and/or medical expenses), empirically we do find there is a tradeoff: consumers face higher premiums when large NFPs convert to FP status. Although we do not directly study quality, we find no indirect evidence of quality improvements, as inferred from a model of employee health plan choice. Moreover, we do find evidence that rivals of converting plans experienced sizeable increases in medical spending following conversion, a result that suggests FPs are likelier than NPs to engage in risk selection practices (e.g., denying or deterring enrollment of individuals with poor health or high health risk, a practice that was legal during the study period).
Our findings have several implications for regulatory and competition policy vis-à-vis insurers. First, it appears that sizeable FP insurers are more likely to exercise market power via price increases than are comparable NFP insurers. Second, pricing actions by large insurers have a ripple effect on rivals’ prices, further solidifying the evidence of oligopolistic conduct in many local insurance markets. Third, there is no evidence that NFP and FP insurers charge different prices in the large group market when both are relatively small.
For the full 70 page paper:
By Don McCanne, M.D.
This is a study of conversions of not-for-profit Blue Cross and Blue Shield (BCBS) affiliates to for-profit status. So what are the findings?
- BCBS premiums increased in markets where the converting affiliate had substantial market share.
- When BCBS affiliates increased their premiums the competing rivals also increased their premiums.
- Medicaid enrollment rates also increased in these markets, a pattern consistent with “crowd in” of families who were formerly privately insured.
- The results suggest for-profit insurers are likelier than not-for-profit insurers to exercise market power when they possess it.
- The findings are consistent with models in which not-for-profits prioritize enrollment over profits whereas for-profits prioritize profits over enrollment.
- There was no indirect evidence of quality improvement (though quality was not specifically studied).
- Rivals of converting plans experienced sizable increases in medical spending following conversion, a result that suggests for-profits are likelier than not-for-profits to engage in risk selection practices (e.g., denying or deterring enrollment of individuals with poor health or high health risk).
Thus when not-for-profit private insurers change to for-profit status, not only do their prices go up, it creates a culture of greed in the community since their competitors increase their prices as well.
Although this study was about insurers, the findings are similar for the for-profit health care delivery system. Costs go up, and quality does not improve. In our profit-oriented health care system, the patient-consumer loses.
The policy solutions are easy. Get rid of the private insurers and establish a single universal risk pool that covers everyone – a Single Payer Medicare for All. For the health care delivery system, convert the for-profit sector into not-for-profit entities.
In the second week of February, Rep. Pramila Jayapal will be introducing new Medicare for All legislation. We should make sure that it includes provisions for conversion of the for-profit sector into not-for-profit entities. If such a provision is not in the legislation then we need to encourage our legislators to amend the bill so that it is included.
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