This story by Rob Weisman in today's Boston Globe is about large insurance rate increases being faced by small businesses in Massachusetts. But, it is really about the lack of effective competition in the Massachusetts health care market, both on the provider side and the insurer side.
Although there are many contributors to rising health care costs in the state, one major one is the fact that the largest provider system is paid rates that far exceed the rest of the industry. This is the result of its market power and leverage over the insurance companies during rate negotiations. Yes, part of the problem is a fee-for-service payment regime that encourages overuse; but that is compounded when the dominant system's FFS rates are very high relative to the market. Why? Because it enables that system to recruit community physicians into its network at higher salaries, away from other systems. Those local doctors, in turn, refer their patients to the higher priced hospitals in that same network. This is a vicious cycle of higher rates, leading to network growth, leading to still more bargaining power, leading to higher rates.
Why do the insurers put up with this? Because there is a public perception, unsupported by clinical outcomes data, that the dominant provider must be part of any insurance plan's network. The plans, therefore, are afraid to leave those hospitals out of their insurance products. They also seem reluctant to create a market for insurance products that would charge customers a higher co-pay or add other features that would encourage the patients to go to lower-priced facilities.
The result: Utilization in the network served by the dominant provider grows at a rate exceeding the regional average. And because that utilization is reimbursed at a higher differential rate, the insurance company sees a huge cash outflow, and feels it necessary to raise rates -- especially to the market segment that has the fewest choices.
The second problem is a similar lack of competition in the insurance market itself. In any other industry, a competitor would enter the market and create a niche product -- a plan for small businesses and individuals, based on a limited high-quality, low-cost provider network.
National insurance companies have had a very small market presence in our state. Those who have thought about expanding their share of the Massachusetts market are probably concerned about the relative costs of doing so or about the ability of the insurers in this state to simply underprice their products. Well, we now see evidence that even the dominant insurer might feel it cannot afford to respond competitively to a new market entrant. That insurer, along with the others, is so persuaded of the market power of the dominant provider that it has been reluctant to take on that provider by leaving it out of its product mix or by including it at the premium price necessary to cover its costs.
A new entrant might feel differently and focus its efforts on a vulnerable market segment, one that would find a high-quality, low-cost network attractive. When you are fighting for your financial life as a small business or individual purchaser of insurance, you are more willing to make different kinds of choices. And, as a small business, you can more easily explain to your employees why you have done so.
To me, this seems like an opportunity for competition.