It's The (Lack of) Competition, Stupid!!!

Some of the health care changes being contemplated in Washington could have significant impact in South Carolina. A front-page story in The State Newspaper yesterday focused on the concerns of the management of Blue Cross Blue Shield of SC (BCBS SC). I sifted through the article looking for some usable information about BCBS SC, which is pretty scarce for this company. Here is what I gleaned:

1. Privately held, for profit, mutual company and therefore does not have to report its profits.
2. Employs more than 11,000, including 9,000 in South Carolina and more than 6,800 in the midlands.
3. Revenue of $5.9B in 2008.
4. Health insurance, about 27% of their business, had 2008 revenues of $1.6B.
5. 2008 profit from the insurance business was $120M.
6. 2.1 M South Carolinians, about half of the population, are insured by BCBS CS or have their plans administered by BCBS SC. (I’d like to know the split here. How many policyholders account for the $120M profit reported in item 5?)
7. Has 32 subsidiaries including some that have government contracts with Medicare and Tricare (for members of military).
8. Processed 785M claims in 2008 including those for their own insurance operations. (I guess this means they also made profits on processing the claims for their own insurance business in addition to the $120M in item 5 above.)
9. They had reserves of $1.3B in 2008.

The complicated structure and lack of public reporting requirements make it very difficult to draw significant conclusions from these numbers. I think South Carolinians can rest assured that BCBS SC management is very competent and will continue to keep the company playing key roles in the US health care system whatever it is. That is good news for South Carolina.

Some superficial conclusions that might be drawn from the above are that if the $120M of profits from their health insurance company were divided up among 2.1M policy holders, it would amount to less than $60 per policy holder. Not going to get much help there in reducing health care costs. If all the rest of their revenue besides the $1.6B from the insurance business was used processing the 785M claims, cost per claim would be about $5.50 per claim. That’s pretty cheap. The $1.3B in reserves would amount to a little over $600 for each of 2.1M policy holders, and that doesn’t seem excessive. I don’t see any ready answers to the problem of high health care costs in any of these figures.

However, buried among the facts and figures was one comment that could provide the key to significant reduction in health care costs. According to Mr. Ed Sellers, CEO of BCBS SC: “Insurance companies pass along rising costs of drugs and other expenses, he said. When a hospital buys a multimillion-dollar piece of equipment, for instance, those prices get passed on, he said.”

Well, no wonder costs keep increasing much faster than for most other products and services! Of course all businesses talk about wanting to pass along their cost increases to their customers, but for those facing competition, such talk is some combination of blarney, baloney, and bravado. It can’t be done unless all the competitors are seeing the same increases at the same time. And, if they talk to each other about such issues, they can be sent to jail.

Here’s the point. The basic cause of escalating health care costs is that health care consumers have been taken out of the negotiating process, and the laws of supply and demand have been replaced with expensive bureaucratic controls managed by government and insurers and employers. We know the bureaucracy is expensive because just this one company, BCBS SC, has 11,000 employees that are part of the health care costs but do not provide health care. (Of course it takes a lot of employees to keep up with the more than 10,000 services covered by the Medicare Physician Fee Schedule discussed here.) In the absence of head-to-head competition, a hospital considering a major capital investment asks not about the market price, demand, and capacity for services provided by such equipment but rather about the reimbursement rate for such services. Costs remain high because they are controlled at managed reimbursement rates and providers are not allowed to compete for market share by adding capacity which, in a free market, would necessarily drive down costs for consumers.

So now we know why health care costs keep rising while costs of computers and MP3 players and cell phones and big screen TV’s and video cameras and LASIK surgery keep coming down. It’s the (lack of) competition, “stupid!”

(For an informative article that includes discussion of how competition has worked in the field of LASIK eye surgery, see http://www.theatlantic.com/doc/200909/health-care.)