Private health insurance exchanges, like those created by the Affordable Care Act or in Medicare Advantage, have historically failed to control cost. Part of the reason is the basic economic issue of individuals lacking real market power and actually choosing the “best” insurance option, which is extremely complicated. Another problem is lobbying related.
Whenever you needlessly create private middlemen you also create another layer of lobbyists. You don’t just have providers lobbying for higher prices, you now have private insurances companies lobbying for them as well. Because of their business design these middlemen are even better at lobbying and/or rallying their customers to lobby. This dynamic makes what we have seen happen in Medicare Advantage more likely to occur. From CNN:
CMS had initially proposed a 2.3% reduction in what the government pays the insurance companies that provide the plans — a move that would have saved the government money but potentially would cost the public more.
However, CMS on Monday announced a 3.3% increase instead.
Insurance companies were upset by the proposed cut, and spent the public comment period time lobbying legislators and running ads against it.
The idea is that exchange insurance companies are going to drive down the price by competing over a share of the pie. While they do some of that, they also get together to lobby to make the whole pie bigger.
Photo by Phalinn Ooi released under Creative Commons License