Adverse Selection---Key

Gerald Friedman 17, Professor of Economics, University of Massachusetts Amherst, 6-29-2017, "Why market competition has not brought down health care costs," Conversation, https://theconversation.com/why-market-competition-has-not-brought-down-health-care-costs-78971

Lemons and cherries So if the rising cost of administration is a primary force driving health care inflation, why don’t we do something about it? That’s because administrative complexity and waste are no accident but rather are baked into our private health insurance system and made worse by continuing attempts to use competitive market processes to achieve social ends other than maximizing profit. Paying a doctor was relatively simple in the 1960s. Most people had the same insurance policy, issued by Blue Cross and Blue Shield, which back then was a private company but operated like a non-profit under strict regulation. But in hopes of controlling steadily rising costs, policymakers encouraged insurers besides Blue Cross to enter health insurance markets, beginning with the HMO Act of 1973. The proliferation of for-profit companies with competing plans raised billing costs for health care providers, which now had to submit claims to a multitude of different insurers, each with its own codes, forms and regulations. Not only that, but insurers quickly discovered the dirty secret of health care finance: Sick people are expensive and make up most costs, while healthy people are profitable. In other words, the vital lesson for an insurer looking to make money is to identify the few sick people and get them to go away (“lemon dropping”) and find the healthy majority and do things that attract them to your plan (“cherry picking”). Insurers are happy to offer discounts on fitness club memberships to attract healthy people, for example. But they punish the sick with higher copays and deductibles, as well as increasingly restrictive and intrusive regulations on preauthorization. Economists call it adverse selection. Regular people call it paperwork hell. Whatever the name, it’s the purpose of increasingly complicated insurance plans and reimbursement forms.