Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance

http://www.business.uiuc.edu/finance/cbpp/papers/Rebitzer.pdf ^ | 8/28/2008 | Randall D. Cebul, James Rebitzer, Lowell J. Taylor, Mark Votruba

[dajeeps]

In the United States, health insurance for those under age 65 is typically provided through group plans purchased by employers from commercial insurers. In the health insurance market, insurers provide complex multi-attribute services, and search frictions arise as employers undertake the costly process of finding appropriate health insurance for their workers. These frictions distort market outcomes by increasing insurance turnover rates, increasing the price of health insurance. Our empirical analysis indicates that frictions are most severe in the “fully insured” part of the health insurance market and that the magnitudes of the frictions in that market are sufficient to transfer a quarter of the consumer surplus from policy-holders to insurers (a transfer of 32.5 billion dollars in 1997). The capture of consumer surplus and high rates of turnover have the effect of reducing incentives to invest in the future health of policy holders.

[dajeeps]

I found this research paper that was originally posted on the NBER (National Bureau of Economic Research) web site. It's an interesting document that mirrors some of the provisions in the at least one of the health care reform bills that is currently on the house floor.

I'm not a professional macro economist and don't have the credentials to take a deserving poke at it with a big stick, but it seems like it is missing the bigger picture by narrowly focusing on cost generated from employers shopping around and ignoring the affects of restrictions on competition completely. It seems like it was written for political purposes only.

It would be nice if someone with connections to the scholars at Cato could get them to take a crack at it.

[dajeeps]

This stuff is important because it is sloppy "scholarly" work that is being used by the RATS to perpetuate the lie that only government can solve health care issues when many are already aware that the government created the majority of the problem of skyrocketing health care costs.

The text of the abstract of the NBER version reads this way:

We analyze the role of search frictions in the market for commercial health insurance. Frictions increase the cost of insurance by enabling insurers to set price above marginal cost, and by creating incentives for inefficiently high levels of marketing. Frictions also lead to price dispersion for identical products and, as a consequence, to increases in the rate of insurance turnover. Our empirical analysis indicates that frictions increase prices enough to transfer 13.2% of consumer surplus from employer groups to insurers (approximately $34.4 billion in 1997), and increase employer group turnover by 64% for the average insurance policy. This heightened turnover reduces insurer incentives to invest in the future health of their policy holders. Our analysis also suggests that a publicly-financed insurance option might improve private insurance markets by reducing distortions induced by search frictions.

http://www.nber.org/papers/w14455