The fantasy of health insurance competition. 

Don’t be mislead by claims that competition among insurance companies is the answer to rising premiums. That’s a conservative fantasy. 

First, the law requires that small plans and individual insurance pay at least 75% of premium in claims and directly related services. For larger plans 80%. But that’s not even the real story. Less than 10% of total premium (more like 5-7%) is subject to competition. The rest is claims, required administration, state taxes and claim reserves. 

So, if your premium is $100, $7.00 is up for debate, but the $7.00 will not go away totally no matter what. 

Wait, someone will say. Why did some insurance companies have to return excess premium under the 80\20% rule? Well, because premiums are set more than a year in advance of when all claims are known. That means that within any premium cycle it’s quite possible that premiums may be set too high or too low. But in the end the overwhelming portion of premiums are spent on health care. 

Insurers may compete on plan design or provider networks, but in that case you are not getting the same product and your premiums are not being affected by competition, but by the level of your out-of-pocket costs and your ability to select doctors and hospitals. You can always trade premiums for less coverage. 


3 replies »

  1. Yep! Totally agree. Competition is an effect of free markets. Health insurance has become anything but a free market since government mandates what products must be sold and what profit margins are acceptable. Health insurance is closer to being a public utility than a free market. If you think your electric bill is too high, try to find a competitor who will lower it. You might be searching for a long time.


    • I often wondered why in NJ where the State approves the number of hospital beds permitting monopolies just like utilities, why the hospitals have to advertise for patients? In South Jersey there is only one or two hospitals to choose from in each county. Distance and private insurance dictate where you can go and for what. If the hospitals have to advertise to fill their beds in their cancer or cardiac wards, are there already too many beds and shouldn’t the costs come down? I guess that is why anybody who is pay without insurance get raped by paying list price instead of pennies on the dollars like the insurances demand.


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