RALEIGH – Count me among the puzzled.
Advocates of expanding Medicare, expanding Medicaid, or otherwise creating a new government-run health plan seem fascinated with the fact that in many states, a single private insurer dominates the individual and group markets for health insurance. They decry monopoly, though having 70 percent market share doesn’t really fit the definition. Yet they promise monopoly, in a very real sense.
In North Carolina, the rhetorical back-flips are a bit more puzzling, not to mention entertaining, because the dominant private player is the nonprofit Blue Cross & Blue Shield Association. Finding it inconvenient to blame the evil prospect of profit for the problems in our state’s insurance market, activists have resorted to attacking CEO Bob Greczyn’s $4 million salary as if it had some significant bearing on health costs or access.
I have no idea if Greczyn is overpaid. I lack the information necessary to second-guess the board charged with the task of retaining effective management in a competitive – yes, a highly competitive – market for executive talent. But what I am confident about is that if you add up his salary and that of other top Blue Cross executives, the result wouldn’t come close to explaining the rise in health care costs or the inability of hundreds of thousands of North Carolinians to purchase true health insurance coverage at reasonable prices. Executive compensation is a tiny fraction of the bill.
Profit won’t take you very far as an explanation, either. The average profit margin in the health insurance business is a little less than 4 percent. If there were some way to eliminate it entirely, that wouldn’t save enough to curtail medical inflation noticeably or to subsidize coverage for the uninsured. But even that would be an overstatement of the potential “savings,” reflecting a misunderstanding of what profit is.
Any large-scale enterprise, private or public, must raise sufficient capital to invest in assets and cover unforeseen costs. Profits represent the return to shareholders for investing their money in building and operating the business. Government-run health insurance programs also have to pay to acquire necessary capital. Taxpayers bear this cost in part through tax compliance – higher levels of taxation require costlier efforts to collect and comply with the tax code – and by paying interest to holders of government debt. These costs may not show up in simplistic comparisons of health care spending, but they are very real.
But back to BCBS of North Carolina for a moment. According to last week’s Triangle Business Journal, the nonprofit took in nearly 70 percent of all premium dollars in the state’s health insurance market. It sells virtually all of the policies in the individual market – plans marketed directly to families rather than to employers – and is also the dominant player in the group market.
The issue, however, isn’t so much whether BCBS or another other insurer dominates the market, but why. If a firm earns a dominant market share because it delivers the best service at the best price, then by definition it isn’t hurting consumers. But if a firm owes its dominance to unfair barriers to entry that keep competitors out, consumers are hurt.
In health insurance, there are indeed unfair barriers to entry. For decades, the Blues have used their political power in state capitals to acquire exceptions to taxes and regulations imposed on commercial health insurers. The TBJ piece points to a recent example in the 1990s. North Carolina imposed price controls on small-group plans in an attempt to protect consumers. Insurers were no longer allowed to adjust premiums more than 25 percent in a year, up or down. That had a disproportionate effect on new entrants and smaller firms without the ability to handle unforeseen risks in insured groups of 50 or fewer members). Such rules always work to the advantage of larger, established players in the market – which is often why the rules make it through the lobbying process in the first place.
In the past, then, the Blues have assumed dominant market positions because of special government assistance. Now, the Left wants to set up new public or nonprofit insurers, with special government assistance, as an “option” to the Blues.
My head hurts.
Hood is president of the John Locke Foundation