During the wage and price controls in World War II, companies devised a new way to compete for scarce labor by introducing employer purchased health insurance as a benefit of employment. This continues to the present day.

When the buyer of a product or service is not the end user, this creates non-alignment of incentives between buyer and user. The market cannot respond to the preferences of a user who is not a payor. Only the flow of dollars will modify the features of goods or services offered.

On the other side of the coin, a buyer not pressured by the constraints of price or budget will have an unlimited demand for goods or services. The health insurance industry response to rising costs was first to increase premiums. However, payors preferred reduction in coverage to increasing costs, and thus managed care (read reduced care) was born.

Health care users predictably resented gatekeepers and denial of care, which has become a mainstay of insurance company strategy. Although HMOs have largely disappeared, insurance companies, and increasingly the federal government are active participants in treatment decisions through their approval processes.

Today, huge health insurance companies have become monopolies (or more accurately oligopolies) as sellers of health insurance. In addition, these same insurance carriers exercise monopoly power in the purchase of health care services, controlling price paid and scope and nature of services covered.

Hospitals have joined in ever-larger groups in order to maintain market power in negotiation with insurance companies.

Physicians, on the other hand, with few exceptions have not been permitted to negotiate as large groups. Consequently, during this time of double digit health care cost increases, physician reimbursements have actually gone down.

Medical practice has become a high volume exercise just to keep up with overhead. The result is of course not savings but cost shifting without any working price mechanisms medical costs will tend to outpace inflation in the rest of the economy.

Etienne Taylor
Clinical Data Labs, Inc.

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