In a vacuum sure. But insurance companies operate the only part of the healthcare system that is moderately competitive. In the end employers are the ones largely paying and they are professional negotiators enough to put price pressure on insurance plans. 20% of $0 is $0.

As such, as light of an incentive it is - it’s the only party in the entire system that is incentivized in any way whatsoever to keep costs down.

Insurance providers also rarely operate at the full freight 20% either way though. So they are at least at this time incentivized to control costs at some level since every dollar saved is a dollar added to the profit line. Otherwise they would not be known for denying claims so often.

This is ignoring a whole lot of very important complexities as well - such as self funded insurance plans that most major companies utilize. There the insurance company is simply a plan administrator getting paid the same either way.

It’s one of those tropes that has a source of truth behind it but the actual reality is far less satisfying of an answer. Makes for great sound bites and ability to shut down further thought on the subject though. The uncomfortable truth is that there is no simple fix and no one bad actor that is the cause of all the insanity.

This is the same problem with cost-plus contracts in the military. In theory, capping profit is meant to reduce profiteering. But in practice, if your profit is fixed at 6% of the cost to built a jet fighter then you're incentivized to make that jet fighter as expensive as possible. The way to maximize profit under a cost-plus regime is to maximize the cost.

It's a bit more complicated than that. First, most large health plans regulated under the Affordable Care Act are actually subject to an 85% minimum medical loss ratio. Some of the larger payers which also have their own providers as employees within the same parent corporation are able to shift money around with internal pricing agreements so that they make larger profits on the care delivery side.

But at the same time, the business is still pretty competitive with the employers and consumers who purchase policies or rent networks being price sensitive. Employers will switch carriers to get a significant cost savings so that holds down prices (and carrier profits) to an extent. Most large employers (and unions) are now self-funded so the "insurance" company isn't actually bearing much risk, they just set up a provider network and process the claims.

Most doctors are almost completely ignorant about the broader issues of healthcare financing and medical economics so take anything you hear from your friends with a grain of salt. (And to be fair, it's not something we should expect them to be experts in.)

You can really just say anything and get upvoted on this website.

If this were true then private insurers would have paid comparable rates to Medicare prior to the ACA passing, and that's just not the case. This fact has been a fixture of the US healthcare system since the creation of Medicare.

So I happen to be in Costa Rica for the month. Just like every other 1st world country, it has managed to have universal health care that is better and cheaper without private insurance.

Even if you do get private insurance for quicker access, it’s still much cheaper than the US.

I just spoke to someone who flew down here to save $30K on dental work.

The problem isn’t the ACA, it’s the ass backwards American health care system. I was at a meetup of American ex-pats here and half of them said they established residency here to join CAJA - the health care system

This isn't the whole story. There's a lot of "legal" self-dealing going on where insurance companies essentially own providers and then pay the providers which allows the insurance companies to circumvent the medical loss ratios.

More here:

https://healthcareuncovered.substack.com/p/self-dealing-ille...

There are other structural issues at work that you see across US government procurement generally, Medicare just being one example.

The unit costs of doing business with the US government are higher than with private companies even after accounting for economies of scale. The US government also requires that they pay the lowest price. Consequently, unit economics are usually worse when dealing with the government than when dealing with private companies.

The maths often don't math but the law doesn't care. Most inexplicable and bizarre pricing you see related to government procurement are structural tricks vendors use to indirectly fix the unit economics across their customers while technically staying compliant with bad regulations. Everyone else who is not the government is collateral damage of that byzantine theater.

Ideally, we would all drop the pretense that the US government deserves the lowest price just because they are very large, instead letting it reflect the true overhead cost.

Most insurance is funded by employers who would switch insurers if they feel they're getting screwed by them.

> So insurance companies spend more so they can collect higher premiums.

This part is still true though. Insurers want you to consume more healthcare, so they'll happily pay for your chiropractor, acupuncturist, acne treatment, and Chanel gift bag [1]. Patients are happy with their benefits. Employers are happy with increasing employee retention in a tax advantaged way. Insurers are happy with the profit. Of course, you aren't going to see much health improvement from this though.

[1] https://nypost.com/2024/07/25/lifestyle/nyc-hospital-bills-3...

These limits don’t apply to self-funded programs that are administered by big insurance companies (most large employers’ plans, then) or plans less than two years old (whether there are measures in place to prevent simply rotating plans often to exploit this, I do not know)

That's not why prices continue to increase. They can't just let prices skyrocket to pad their pockets. If they try, government regulators will block premium hikes, regular people will ditch them for cheaper competitors, and big businesses that pay premiums from cash will fire them for not keeping medical bills lower.

This is correct, but neglects the compounding effect.

Insurers are also adding some %+ increase on premiums every year, which is taken as a % of their yearly spend, ie 2-3%.

ie (1+inflation)^N*(base_prem+overpay_prem_increase) = new_premium. The compounding of $ returned is pretty big on this.

That being said underwriting risk, under the law and avoiding correlated risks, is tough.

> Obamacare requiring 80% of the money they collect to be spent,

did they not write unit tests for this when it was proposed to catch obvious subversions like you mentioned.

This seems like we need similar price caps for healthcare providers, medical equipment providers, pharmaceuticals, etc. Done just in isolation for 1 part of the healthcare industry results in this obvious bad effect.

Removing the rule wouldn't help things.

You've identified a real issue with cost-plus pricing. But there's more to it than that. Commercial insurers have to pay more than Medicare, for the very simple reason that Medicare's pricing terms are that they get a discount beyond whatever the lowest price is that you charge anyone for the same thing.

(Is it a 60% discount? No; a 150% margin has to be explained in other ways. But the phenomenon is real and important.)

> The people who design easily gameable systems belong in the lowest circle of hell.

-- Charlie Munger

This would only hold empirically if prior to the ACA, commercial insurers did not pay more.

I was under the impression that some companies that provide insurance also provide healthcare?

The problem is the market isn’t competitive due to hidden pricing and also anti competitive aspects like insurance. The supply of doctors is itself artificially low. There is a lot more regulation needed than something as simple as Obamacare.

Managed risk pools should not be for profit.

Several doctor friends told me your doctor friends aren't real.

My understanding is that there are a number of reasons why commercial insurance companies pay more. A big one is that Medicare has enormous pricing power because people on Medicare are a huge segment of the population and also the segment that consumes the most healthcare services. Your local healthcare system can't NOT take Medicare. They're effectively stuck with the reimbursement rates that Medicare sets. On the other hand, healthcare systems have a ton of power in their local markets. A healthcare system can afford to not be in network for a particular insurer, but if that insurer loses access to the biggest healthcare system in a particular market, it can be devastating for them. A major employer is not going to be happy if their executives have to all change doctors because the big local hospital system is no longer in network.

Ding Ding Ding. We have the correct answer. And this was a predicted consequence of that profit cap.

You mean that there is a rule which prevents for-profit companies offering personal health insurance from pocketing more than 20% of revenue?

Those poor, benighted shareholders. What a socialist hellscape.

[dead]

This. It's hard to believe that the Obama team could have been this financially incompetent.

I remember consulting for a healthcare company in .... 2003. Very short assignment so I never got deep into it, but anyways my consulting company made me read up an in house guide about ALR and MLR (Administrative or Medical Loss Ratios). Obamacare or not, such constraints already exists. Maybe they varied by state, maybe there were other loopholes such as not supporting pre-existing conditions, but IIRC there were restraints on pure profits, so even then the same perverse incentives existed. More revenue you can get more profits.

I am going by very old memory of a few days/weeks of work, but it will be good for a medical system historian to chime in.