Tort Reform and Competition Solutions for Health Care Reform

Tort reform, competition and health care reformMany people I’ve spoken with say that the sensible way to bring down health care costs would be 1) enact some form of tort reform and 2) allow insurance companies to compete across state lines.  While these solutions sound sensible, they need to be deconstructed to some degree to find that they won’t/don’t really reduce the price of health care expenditures in this country (around $2.3 trillion), at least not much. Keep in mind that $2.3 trillion equals $7,491.85 for every person in the country ($2.3 trillion/307 million).

Let’s start with tort reform.  Malpractice insurance premiums in this country are estimated at about 1% of total health care costs in this country.  That would put total premiums at $23 billion.  Let’s be generous and assume that tort reform would reduce premiums by 25%.  That would result in savings of $5.75 billion.  On top of that, let’s assume an  estimated cost reduction through reduced utilization of health care costs (CYA tests that doctors order) would result in an additional $7 billion in savings, for a total savings of $12.75 billion (more than the 2009 CBO estimte of $11 billion).  Now, $12.75 billion is nothing to sneeze at, but we are still only talking about reducing total U.S. health expenditures by less than 0.6%.  So while tort reform would save money, it would NOT reduce health care spending (or health care premiums) by any considerable degree.

Now let’s take a look at selling insurance across state lines.  The argument goes that if there is more competition from more insurance companies, then price will be driven down.  The problem I see with this is that health insurance is not like other consumer goods.  Sure, if I were looking for a bicycle I would want as many bicycle manufacturers as possible competing for my purchase.  Basic economics will show that an increase in supply will result in lower prices.  So why doesn’t this work for health insurance? 

The answer is “networks”.  Insurance companies such as Blue Cross are able to keep insurance premiums down by negotiating lower payment rates with providers in their network.  If you go to a provider that is out-of-network it will cost the insurer (and you) more.  So let’s assume that Kaiser Permanente is allowed to compete in Illinois.  Their $500 deductible policy is cheaper than Blue Cross Illinois, but the reason I know you will not buy it is because Kaiser does not have a network in Illinois; meaning that any doctor in the state of Illinois that you go to will be considered “out-of-network”.  This means you will be paying higher deductibles, higher co-insurance, higher out-of-pocket costs and that Kaiser will not have negotiated a discount, so the amount charged to you will be higher than the Blue Cross negotiated pricing discount.  Okay, but wouldn’t Kaiser start negotiating with providers to build their own network in Illinois?  Probably, but here’s the problem.  There is a direct correlation between the discounts an insurer can negotiate and the amount of market share they hold in any given market.  A new insurer such as Kaiser coming into the Chicagoland market (or Peoria market, or Rockford market, etc.) has very little leverage with providers.  A doctor or hospital will be less likely to discount prices for Kaiser because they have very little to lose by not negotiating.  If the doctor/hospital walks away from Kaiser, they maybe lose access to a couple of hundred people whohave Kaiser policies.  Blue Cross, on the other hand, probably has a couple of hundred thousand people insured.  Doctors and hospitals HAVE to negotiate with Blue Cross or the bulk of their patients will find an in-network Blue Cross provider resulting in lost revenue for the doctor/hospital that didn’t negotiate with Blue Cross.  The end result will be that while more insurance companies are in the Illinois market competing, none will be able to compete with the top two or three market share holders when it comes to discounts and, ultimately, premium cost.   

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One Response to Tort Reform and Competition Solutions for Health Care Reform

  1. L Frighetto says:

    You are a very good writer. I enjoy reading your blog. You provide a lot of great information in an entertaining and professional way. Thanks.

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