How to Lower Health Insurance Premiums

Continuing our outline of Medicare Prime (MP), an “optimal” public health insurance system based on economic principles and data-driven research, we explore one of its benefits for middle-income households, i.e. lower premiums.

Why Insurance Premiums Are So High

In an earlier post I explained how Medicare and Medicaid (M&M) affect the private insurance market. M&M competes with private insurers for healthcare providers, e.g. hospitals and doctors. Using its superior market power, M&M pays only the incremental operational costs of treating its enrollees. This forces providers to charge private insurers much higher rates than they otherwise would in order to cover their capital costs. On average, private insurers pay twice as much as M&M for the same services, excluding prescribed drugs.  These high rates are then passed along to households in the form of higher health insurance premiums.

Figure 16.1 illustrates this phenomenon. The supply curve for private insurance shifts upward. This is a decrease in supply. The result is an increase in the equilibrium price at a lower equilibrium quantity. Or in other words, public insurance partially crowds out private insurance and is one of the reasons the price of private insurance is so high.

Figure 16.1 The Market for Private Insurance

The Affordable Care Act (ACA) subsidies also affect premiums, but in a different way. Instead of decreasing the supply of private insurance, they increase the demand for it. Figure 16.2 shows the demand curve shifting upward by the amount of the subsidy. This causes the price (i.e. premium) to increase from P1 to P2. Households that qualify for the subsidy pay P2 minus the subsidy and increase their quantity from Q1 to Q2. Households that do not qualify for the subsidy pay P2 and decrease their quantity to Q3.  This is another example of crowding out and another reason why private insurance premiums are so high for households that make too much money to qualify for a premium subsidy.

Figure 16.2 Effect of ACA Subsidies on Private Insurance Market

Who Would Benefit from Medicare Prime?

In a previous post I stressed that for the rich and the poor, MP would be little different from the ACA. Households below 138% of the Federal Poverty Level (FPL) would still have 100% of their healthcare expenses covered by public insurance if they used only in-network providers. Affluent households would not directly benefit from this system. They would still need to pay their healthcare expenses through private insurance or out-of-pocket. Nothing new there.

The main difference in insurance coverage would be for households that fall in between, i.e. the middle-income households. These households earn too much money to have first-dollar coverage (i.e. zero deductibles) from MP. But that doesn’t mean they would not benefit from it.

A non-zero but relatively small MP deductible would mean that any potential private insurer would incur lower risk than would otherwise exist and would result in a lower private insurance premium. For many middle-income households, MP would be, in effect, a high-deductible, catastrophic coverage plan. But since MP is primary, that coverage protects both the household and its private insurer.

In the next post we will attempt to quantify the benefits of MP.

Published by TheLoneEconomist

I am a PhD economist who studies just about anything and proudly specializes in nothing.

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