Uninsured Prices for Healthcare Products and Services

It is often claimed that drugmakers and other healthcare providers raise prices for the uninsured to make up for the profits lost when selling to insurance companies, for example, here.

This is almost certainly a mistaken belief, as I note in the following comment :

The high prices for the uninsured are the inevitable result of the insurance companies as a group being the dominant customer for both drugs and other medical services.

If the uninsured could get the same discounts as the insurance companies, the insurance companies would have no real reason to exist in anything like present forms.

So if a drug company or other provider wants insurance company business, it must agree to not sell to the uninsured at a discount. As long as the business of the insurance companies is of vital importance to the providers, they can only get adequate prices from the insurance companies by raising the pre-discount price for the uninsured, EVEN IF THAT PRICE IS SO HIGH THAT IT PRODUCES NO SALES AT ALL.

If healthcare were a normal market without third party payments, the market prices would be much closer to the discounted prices that the insurance companies currently pay.

Regards, Don

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How high are the barriers to

How high are the barriers to entry for the insurance business?

Nancy,How high are the

Nancy,

How high are the barriers to entry for the insurance business?

I don't know, but I doubt that it is a business that people are dying to get into (that's the undertaking business ).

It is a business marked by both profit and non-profit competitors and high levels of complex and variable regulations. It is likely a business that makes little sense to be in unless you own a number of influential state legislators and a tame corporate board.

How many healthcare insurance companies does Warren B. and Berkshire Hathaway own? I don't know either, but I'll bet the number is zero.

Regards, Don

They own at least one,

They own at least one, Medical Protective:

http://www.berkshirehathaway.com/subs/sublinks.html

Kurt, A different line of

Kurt,

A different line of business --

The Medical Protective Company is the oldest professional liability insurers in the United States. In fact, more than 70,000 physicians and dentists trust us to protect their professional reputations.

Regards, Don

Doh, I'm dumb. ;)

Doh, I'm dumb. ;)

Berkshire does have a stake in a healthcare plan provider

They took a small stake in WellPoint recently, as reported in their SEC filings on Tuesday.

From WellPoint's history web page: "WellPoint, Inc. is the largest health benefits company in terms of commercial membership in the United States. Through its nationwide networks, the company delivers a number of leading health benefit solutions through a broad portfolio of integrated health care plans and related services, along with a wide range of specialty products such as life and disability insurance benefits, pharmacy benefit management, dental, vision, behavioral health benefit services, as well as long term care insurance and flexible spending accounts."

Barriers to entry

Barriers to entry in the insurance market are very high. It is a heavily regulated industry, with health insurance probably the most regulated of them all. The insurer must be licensed to conduct business in every state that policies will be sold, and each state has its own regulations that dictate how insurance can be offered, the features that an insurance contract must have, and in many cases, the minimum percentage of premium that must be paid out in claims. Because of the promises that insurance companies make to their policyholders, the insolvency of an insurance company can affect thousands or even millions of people, so regulators require a certain amount of capital be held in reserve to handle adverse claims. If you were starting up a new national medical insurance company, you would probably need $100 million or so in capital before you sold a single policy, with the expectation that if you started selling a lot of business, the company would require further infusions of capital. Selling too much business is considered a negative for insurers, because it often indicates that the business was underpriced, and puts the company at greater risk for insolvency.

It's not so much a markup

It's not so much a markup for the uninsured as a discount various insurance companies negotiate. They definitely try to offer some "value" through their discounts, but providers seem to be at least somewhat competitive with each other for non-insurance prices. There's a snooty hospital near us, and all the doctors there charge quite a bit more than the doctors at the clinic down the street. The competition is pretty localized, but there's some definite parity between prices (in my experience).

The thing is, though, it's very easy to get those prices from medical providers even when you don't have insurance. You just have to do the "negotiation" on your own. In many cases, you can actually get a better deal, since providers may mark a particular service (fracture care) as being a less costly alternative (office visit). People just aren't used to asking for a better deal on medical care, which is a really big problem.

Oh, and I suspect that in a market without third party payers, the medical prices would be significantly lower than even the discounted prices, especially for stuff like MRIs. At the moment, providers will order up MRIs on a whim. If they actually had to justify the cost, I suspect you'd see "MRI demand" go down substantially, with a corresponding decrease in prices.

You make the assumption that

You make the assumption that the sole benefit of having insurance is to get discounted prices. The benefit of having insurance is risk protection, not some sort of collective bargaining of medicine prices.

Arthur,

You make the assumption that the sole benefit of having insurance is to get discounted prices. The benefit of having insurance is risk protection, not some sort of collective bargaining of medicine prices.

In general, this is true, but in the field of healthcare 'insurance' is more like having your auto insurance additionally cover your gasoline purchases.

Regards, Don

That's a huge moral hazard,

That's a huge moral hazard, why would anyone want such an insurance?
(Sorry I am new to the US healthcare market, I don't know the details yet, but in my mind health insurance has always been about getting cancer or being hit by a car...)

Making up for lost profits

It's also worth noting that the idea of making up for lost profits is a fallacy. If companies could raise prices to increase profits, why would they wait to lose money on other ventures before doing it?