The presidential election is just a week away. And the rising prices of many products and services are on voters' minds. Just over 40% of Americans say inflation is their biggest concern heading into November, according to a recent survey.
In few markets are rising prices more apparent than in health insurance. The average cost of employer-sponsored health insurance rose 7% for the second year in a row, according to a survey published by KFF earlier this month. Average annual family premiums topped $25,000 this year. Workers were directly responsible for nearly $6,300 of that tab, on average.
One reason private health insurance is growing more expensive is that public insurers underpay hospitals, physicians, and other healthcare providers. Those providers compensate by raising rates for private payers—who then pass those increased costs along to employers and beneficiaries in the form of higher premiums and deductibles.
This system is not sustainable. The cost of private health insurance will not come down until there are viable alternatives to employer-sponsored coverage, which is often subject to cost-inflating government mandates—and public coverage accounts for a smaller share of the market.
The scale of underpayment by public insurers is huge. Research published this year by RAND found that the prices paid to hospitals by employers and private insurers in 2022 were 254% of what Medicare would have paid. Payments by Medicaid, which covers low-income Americans, are even lower than Medicare's.
The government can get away with that for two reasons. First, it makes the rules. Providers don't want to cross the authorities that tax and regulate them.
Second, government pays for the care of a lot of people. More than 66 million people in the United States—roughly one in five Americans—have coverage through Medicare. Medicaid and the related Children's Health Insurance program covers nearly 80 million people.
That kind of size gives government clout to dictate what prices it will pay.
But that doesn't change the economic realities of running a hospital or physician practice. Providers need to find higher-paying customers elsewhere to cover their costs.
That's one reason providers have been consolidating. They think that by joining forces, they'll be able to drive a harder bargain with private insurers.
Doctors, meanwhile, are increasingly signing on with hospitals or other corporate entities, instead of going into or remaining in private practice.
Private insurers are behaving similarly, merging with their competitors or buying up other companies within the healthcare supply chain in order to increase their own market power.
Economic theory would predict that all this consolidation leads to higher prices for consumers. Empirical research verifies as much.
Much like providers dealing with the government, consumers don't have much of a choice. Their employer generally decides what kind of health plan they'll get. And the insurer their employer chooses decides on which providers will be covered.
Fortunately, there are ways to break up this over-regulated, dysfunctional market—and reduce costs for Americans. Those efforts start by empowering patients to choose health insurance that best fits their needs and budget, rather than their employers'.
Insurers will have to compete to meet the demands of individual consumers—one-size-fits-all plans will no longer be the norm. This increase in competition will lead to higher-quality, better-value coverage.
Expanding access to health savings accounts would help. These accounts allow people to set aside money tax-free and spend it on qualified healthcare expenses. They own those funds permanently—they need not spend them each year. Raising the contribution limits—currently $4,150 for an individual and $8,300 for a family—and allowing people to use the proceeds to cover premiums would boost their utility.
Employers could also consider shifting away from defined-benefit health plans to defined-contribution health reimbursement arrangements, wherein they give employees untaxed dollars to spend on health insurance or pay directly for care.
The Cicero Institute's "Patient's Right to Save Act" offers another suite of ideas. This model legislation would require healthcare providers to publicly post the cash prices of the services they offer. It would require insurers to count beneficiaries' expenditures at an out-of-network provider toward their deductible if they're lower than what they'd face in-network. And after they reach their deductible, it would allow beneficiaries to receive a cut of any savings they secure by selecting a provider who offers less expensive care than the lowest-cost in-network option.
Anything lawmakers can do to boost transparency and competition—that is to say, anything they can do to make the market for health care function like markets in other sectors of the economy—will help lower costs for patients.
Sally Pipes is a scholar and think tank CEO who writes on health care.
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