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> “What we’re learning from the hospital data is that insurers are really bad at negotiating” Do the insurers have any incentive to negotiate well? Since their

> “What we’re learning from the hospital data is that insurers are really bad at negotiating” Do the insurers have any incentive to negotiate well? Since their customers are not very price-sensitive (since they aren't marketing directly to patients or doctors), I would imagine they don't have a huge incentive to do anything but apply a markup to whatever prices the hospital tells them it costs.

MrFantastic 4y ago
Private Healthcare is the Classic Agency Problem.
jjoonathan 4y ago
Well, if they can negotiate a particular incident down then they pay less for it, but in the long run big picture you're exactly right. So long as they can inject noise into the plan shopping channel and so long as they aren't doing worse than their competitors by that noise margin, they'll do fine. Which in practice means that they just pass along the costs.
lotsofpulp 4y ago
If insurers’ customers were not price sensitive, then they would have higher profit margins than 5%.
- jjoonathan 4y ago
  The accusation here isn't that they are skimming a disproportionate amount, it's that they aren't doing their job, which is to put downwards pressure on provider prices.
  - lotsofpulp 4y ago
    The fact that there are at least 5 large insurers competing nationwide and all have 5% or less profit margins means there is lots of competition, and if they are not providing the best prices, their customers will go elsewhere. See pharmacy forums as an example for all the pharmacists complaining about how independent pharmacies are so tough to operate due to ever smaller payments from insurance companies for the past 10 years.
    - jjoonathan 4y ago
      > if they are not providing the best prices, their customers will go elsewhere Nope. Not if they can inject enough noise into the comparison process to hide the differences. There's a reason they threw so much money at getting bronze/silver/gold standards killed. They knew it was critical to avoid being squeezed. > pharmacists complaining Pharmacists are a tiny part of the bloat picture and it's always easier to put the screws to smaller players. Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, or stop growing 10% y/y (on top of regular inflation) and then I'll believe that insurance companies are doing their negotiating job.
      - lotsofpulp 4y ago
        > There's a reason they threw so much money at getting bronze/silver/gold standards killed. I am not aware of these standards being killed. I select a Gold HSA plan every year. https://www.healthcare.gov/choose-a-plan/plans-categories/ https://www.healthcare.gov/choose-a-plan/plans-categories/ > Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, and then I'll believe that insurance companies are doing their negotiating job. > Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, and then I'll believe that insurance companies are doing their negotiating job. How are they supposed to negotiate if there is only 1 hospital in an area or a drug company owns the patent to a drug so they are the only seller? The insurance company is mandated to cover emergency care at the hospital and pay whatever price for the medicine if it has sufficient efficacy data, per the laws. When there are generic drugs available, insurance does pay less for those drugs.
        jjoonathan 4y ago
        I could be wrong or I could be remembering that they were effectively killed by inserting a key loophole. I'll have to dig up my notes and probably do some research to figure that out. My point about performance -- 2x, 10%y/y -- stands.
        4y ago
- xboxnolifes 4y ago
  In the US, isn't there regulations that effectively cap their profit margins? Since they have no incentive to increase their margin through negotiation, their only incentive would be to lower their costs below competition.
  - lotsofpulp 4y ago
    Medical Loss Ratio: https://www.healthcare.gov/glossary/medical-loss-ratio-mlr https://www.healthcare.gov/glossary/medical-loss-ratio-mlr It says 80%/85% of premiums have to go back out as payments for claims. > Since they have no incentive to increase their margin through negotiation, I do not see why this would be true. The less an insurance company pays for healthcare, the lower the premiums or can offer and win more business.
    - 31835843 4y ago
      This would be true if there were a reasonable amount of market understanding by customers and the friction to switching were low. Neither are the case. Most of the time, it takes a qualifying life event or open enrollment (once a year) to switch. And then, understanding the trade offs between plans, which are difficult to understand on a good day, is another barrier.
      - lotsofpulp 4y ago
        Then why are insurance company profit margins so low? Why wouldn’t they just jack up premiums irrelevant to their competitors and ignore negotiating pricing and see increasing margins? Low profit margins/multiple sellers indicates a highly competitive field, which means the businesses must be doing something stay in business.
        jjoonathan 4y ago
        Yeah, but "something" could be advertising, kickbacks, cherry picking, lemon dropping, making comparison difficult, selectively optimizing visible metrics while balancing with dirtbag fine print, etc etc. Competition != Productive Competition
- throwaway12245 4y ago
  Aren't all customers "price sensitive" ?
  - lotsofpulp 4y ago
    Mostly true, I should have clarified “customers who have a choice to buy an alternative”.
- owisd 4y ago
  There’s no universal %margin on turnover that applies across all sectors that tells you whether a market is efficient or not. If I supply you widgets for $1000/ea and take a $50 management fee that we assume is fair for the work involved, then if there’s a shortage of widget materials that pushes the price up to $10000/ea, it’s no extra work for me so the fair management fee is still $50. If I charge $500 to keep the % the same I’m adding no extra value for that extra $450. Building contractors are an example of an industry that runs on razor thin profit margins in % turnover terms, because all they’re doing is passing on the cost of labour and materials from their suppliers and subcontractors onto their clients and just making their profit adding value in a thin management layer. Which sounds a lot more analogous to insurers than industries that earn 5% profit on their turnover.
  - lotsofpulp 4y ago
    There are legions of people working at UHC/Anthen/CVS/Cigna/Humana/Molina/Centene trying to price insurance as competitively as possible to win as much business as possible. If they could price it lower and win more business, it is safe to assume they would be. If they could price it higher, then why would they choose to only earn low single digit profit margins? You have 7 huge publicly traded companies competing with each other, and unless there is proof of collusion, it is probably safe to conclude that they are running their businesses as well as they could be. If you think otherwise, then you have discovered an arbitrage opportunity, which would be worth quite a bit so you should be able to pitch it to someone who wants to invest.
hedora 4y ago
All they really need to care about is the average amount paid. Ten $100 brain surgeries and $2,000,000 for 1000 routine neurological screenings is a fine outcome. (Or would be, if not for price transparency)
gnopgnip 4y ago
Health insurance customers are price sensitive
- Zircom 4y ago
  Not really? I'm pretty sure the vast majority of health insurance customers are part of group plans from their employer and so the individual customers have very little influence or choice in the matter, and basically just have to put up with whatever bullshit the insurance companies throw at them since the alternative is seeking individual coverage separate from their employer and paying double or even triple in premiums alone.
  - doktorhladnjak 4y ago
    Exactly. Employers, especially large ones, have big sway over insurance companies. They can change their benefits and shift a lot of business to a competitor. It’s happened at several places I’ve worked. Definitely a hassle for employees but a save employers a lot.
stevebmark 4y ago
Insurers are incentivized to pay higher prices for claims. The Affordable Care Act enforced that insurance companies must have at least an 80% "medical loss ratio." Meaning that insurance companies must make at least 80% of their total spend on actually paying out medical claims. This law was put into place because insurance companies would spend huge amounts of money on advertising and giving execs bonuses, all paid for by patient premiums. Some only paid out 50% of their spend on medical claims. The Affordable Care Act introduced the newer perverse incentive of insurance companies tolerating higher prices. Because if you can only pay your execs bonuses based on 20% of your total spend, insurance companies can pay execs more if the underlying claims they're paying cost more. 20% of a $1,000 MRI isn't as juicy to your C levels as 20% of a $10,000 MRI. All insurance companies, all of them are corrupt. The whole system needs to be burnt down. PPOs are the worst, I wish HMOs were the norm, but that won't fix everything. Further reading: https://www.investopedia.com/terms/m/medical-cost-ratio.asp https://www.investopedia.com/terms/m/medical-cost-ratio.asp
- m16ghost 4y ago
  >The Affordable Care Act introduced the newer perverse incentive of insurance companies tolerating higher prices. Because if you can only pay your execs bonuses based on 20% of your total spend, insurance companies can pay execs more if the underlying claims they're paying cost more. 20% of a $1,000 MRI isn't as juicy to your C levels as 20% of a $10,000 MRI. If this perverse incentive were true, then you would expect the medical care costs to rapidly increase after the passage of ACA, but medical trend has actually slowed down since then[0] [1]. You can also look at the total dollar spend on hospital and medical expenses for the entire health insurance industry [2]. After the passage of ACA, there was a large increase in medical spend as more people obtained insurance coverage, but the increase in medical expenses year over year has settled back into the 5% range, which doesn't seem that perverse. [0]https://www.statista.com/statistics/720767/medical-cost-trend-in-us/ https://www.statista.com/statistics/720767/medical-cost-tren... [1]https://www.pwc.com/us/en/industries/health-industries/library/behind-the-numbers.html https://www.pwc.com/us/en/industries/health-industries/libra... [2]https://content.naic.org/sites/default/files/2021-Annual-Health-Insurance-Industry-Analysis-Report.pdf https://content.naic.org/sites/default/files/2021-Annual-Hea...

MrFantastic 4y ago

Private Healthcare is the Classic Agency Problem.

jjoonathan 4y ago

Well, if they can negotiate a particular incident down then they pay less for it, but in the long run big picture you're exactly right. So long as they can inject noise into the plan shopping channel and so long as they aren't doing worse than their competitors by that noise margin, they'll do fine. Which in practice means that they just pass along the costs.

lotsofpulp 4y ago

If insurers’ customers were not price sensitive, then they would have higher profit margins than 5%.

jjoonathan 4y ago
The accusation here isn't that they are skimming a disproportionate amount, it's that they aren't doing their job, which is to put downwards pressure on provider prices.
- lotsofpulp 4y ago
  The fact that there are at least 5 large insurers competing nationwide and all have 5% or less profit margins means there is lots of competition, and if they are not providing the best prices, their customers will go elsewhere. See pharmacy forums as an example for all the pharmacists complaining about how independent pharmacies are so tough to operate due to ever smaller payments from insurance companies for the past 10 years.
  - jjoonathan 4y ago
    > if they are not providing the best prices, their customers will go elsewhere Nope. Not if they can inject enough noise into the comparison process to hide the differences. There's a reason they threw so much money at getting bronze/silver/gold standards killed. They knew it was critical to avoid being squeezed. > pharmacists complaining Pharmacists are a tiny part of the bloat picture and it's always easier to put the screws to smaller players. Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, or stop growing 10% y/y (on top of regular inflation) and then I'll believe that insurance companies are doing their negotiating job.
    - lotsofpulp 4y ago
      > There's a reason they threw so much money at getting bronze/silver/gold standards killed. I am not aware of these standards being killed. I select a Gold HSA plan every year. https://www.healthcare.gov/choose-a-plan/plans-categories/ https://www.healthcare.gov/choose-a-plan/plans-categories/ > Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, and then I'll believe that insurance companies are doing their negotiating job. > Come back when drugs and hospital stays stop costing twice as much as the rest of the developed world, and then I'll believe that insurance companies are doing their negotiating job. How are they supposed to negotiate if there is only 1 hospital in an area or a drug company owns the patent to a drug so they are the only seller? The insurance company is mandated to cover emergency care at the hospital and pay whatever price for the medicine if it has sufficient efficacy data, per the laws. When there are generic drugs available, insurance does pay less for those drugs.
      - jjoonathan 4y ago
        I could be wrong or I could be remembering that they were effectively killed by inserting a key loophole. I'll have to dig up my notes and probably do some research to figure that out. My point about performance -- 2x, 10%y/y -- stands.
        4y ago
xboxnolifes 4y ago
In the US, isn't there regulations that effectively cap their profit margins? Since they have no incentive to increase their margin through negotiation, their only incentive would be to lower their costs below competition.
- lotsofpulp 4y ago
  Medical Loss Ratio: https://www.healthcare.gov/glossary/medical-loss-ratio-mlr https://www.healthcare.gov/glossary/medical-loss-ratio-mlr It says 80%/85% of premiums have to go back out as payments for claims. > Since they have no incentive to increase their margin through negotiation, I do not see why this would be true. The less an insurance company pays for healthcare, the lower the premiums or can offer and win more business.
  - 31835843 4y ago
    This would be true if there were a reasonable amount of market understanding by customers and the friction to switching were low. Neither are the case. Most of the time, it takes a qualifying life event or open enrollment (once a year) to switch. And then, understanding the trade offs between plans, which are difficult to understand on a good day, is another barrier.
    - lotsofpulp 4y ago
      Then why are insurance company profit margins so low? Why wouldn’t they just jack up premiums irrelevant to their competitors and ignore negotiating pricing and see increasing margins? Low profit margins/multiple sellers indicates a highly competitive field, which means the businesses must be doing something stay in business.
      - jjoonathan 4y ago
        Yeah, but "something" could be advertising, kickbacks, cherry picking, lemon dropping, making comparison difficult, selectively optimizing visible metrics while balancing with dirtbag fine print, etc etc. Competition != Productive Competition
throwaway12245 4y ago
Aren't all customers "price sensitive" ?
- lotsofpulp 4y ago
  Mostly true, I should have clarified “customers who have a choice to buy an alternative”.
owisd 4y ago
There’s no universal %margin on turnover that applies across all sectors that tells you whether a market is efficient or not. If I supply you widgets for $1000/ea and take a $50 management fee that we assume is fair for the work involved, then if there’s a shortage of widget materials that pushes the price up to $10000/ea, it’s no extra work for me so the fair management fee is still $50. If I charge $500 to keep the % the same I’m adding no extra value for that extra $450. Building contractors are an example of an industry that runs on razor thin profit margins in % turnover terms, because all they’re doing is passing on the cost of labour and materials from their suppliers and subcontractors onto their clients and just making their profit adding value in a thin management layer. Which sounds a lot more analogous to insurers than industries that earn 5% profit on their turnover.
- lotsofpulp 4y ago
  There are legions of people working at UHC/Anthen/CVS/Cigna/Humana/Molina/Centene trying to price insurance as competitively as possible to win as much business as possible. If they could price it lower and win more business, it is safe to assume they would be. If they could price it higher, then why would they choose to only earn low single digit profit margins? You have 7 huge publicly traded companies competing with each other, and unless there is proof of collusion, it is probably safe to conclude that they are running their businesses as well as they could be. If you think otherwise, then you have discovered an arbitrage opportunity, which would be worth quite a bit so you should be able to pitch it to someone who wants to invest.

hedora 4y ago

All they really need to care about is the average amount paid. Ten $100 brain surgeries and $2,000,000 for 1000 routine neurological screenings is a fine outcome. (Or would be, if not for price transparency)

gnopgnip 4y ago

Health insurance customers are price sensitive

Zircom 4y ago
Not really? I'm pretty sure the vast majority of health insurance customers are part of group plans from their employer and so the individual customers have very little influence or choice in the matter, and basically just have to put up with whatever bullshit the insurance companies throw at them since the alternative is seeking individual coverage separate from their employer and paying double or even triple in premiums alone.
- doktorhladnjak 4y ago
  Exactly. Employers, especially large ones, have big sway over insurance companies. They can change their benefits and shift a lot of business to a competitor. It’s happened at several places I’ve worked. Definitely a hassle for employees but a save employers a lot.

stevebmark 4y ago

Insurers are incentivized to pay higher prices for claims. The Affordable Care Act enforced that insurance companies must have at least an 80% "medical loss ratio." Meaning that insurance companies must make at least 80% of their total spend on actually paying out medical claims. This law was put into place because insurance companies would spend huge amounts of money on advertising and giving execs bonuses, all paid for by patient premiums. Some only paid out 50% of their spend on medical claims. The Affordable Care Act introduced the newer perverse incentive of insurance companies tolerating higher prices. Because if you can only pay your execs bonuses based on 20% of your total spend, insurance companies can pay execs more if the underlying claims they're paying cost more. 20% of a $1,000 MRI isn't as juicy to your C levels as 20% of a $10,000 MRI. All insurance companies, all of them are corrupt. The whole system needs to be burnt down. PPOs are the worst, I wish HMOs were the norm, but that won't fix everything. Further reading: https://www.investopedia.com/terms/m/medical-cost-ratio.asp https://www.investopedia.com/terms/m/medical-cost-ratio.asp

m16ghost 4y ago
>The Affordable Care Act introduced the newer perverse incentive of insurance companies tolerating higher prices. Because if you can only pay your execs bonuses based on 20% of your total spend, insurance companies can pay execs more if the underlying claims they're paying cost more. 20% of a $1,000 MRI isn't as juicy to your C levels as 20% of a $10,000 MRI. If this perverse incentive were true, then you would expect the medical care costs to rapidly increase after the passage of ACA, but medical trend has actually slowed down since then[0] [1]. You can also look at the total dollar spend on hospital and medical expenses for the entire health insurance industry [2]. After the passage of ACA, there was a large increase in medical spend as more people obtained insurance coverage, but the increase in medical expenses year over year has settled back into the 5% range, which doesn't seem that perverse. [0]https://www.statista.com/statistics/720767/medical-cost-trend-in-us/ https://www.statista.com/statistics/720767/medical-cost-tren... [1]https://www.pwc.com/us/en/industries/health-industries/library/behind-the-numbers.html https://www.pwc.com/us/en/industries/health-industries/libra... [2]https://content.naic.org/sites/default/files/2021-Annual-Health-Insurance-Industry-Analysis-Report.pdf https://content.naic.org/sites/default/files/2021-Annual-Hea...