Are Health Insurers Too Weak?

Empowering health insurers may help contain health care costs, but the move could also stifle medical research and innovation.

David Frum’s comments about insurance companies raise an important point, but he’s wrong to assume that a system that empowers insurers will necessarily produce more innovation than one that regulates them tightly.

If cost containment is the goal, indeed, giving more power to insurers makes a lot of sense and may be less harmful than many other alternatives preferred on the left. The two countries that empower insurers the most—Germany and Switzerland—have largely avoided the waiting lists the plague the Canadian and UK systems, provide near-universal coverage, and offer many of the high-tech medical goodies that Americans want in their hospitals.

Particularly in Germany, however, this has come at the cost of driving the wages of medical professionals to near-poverty levels, stripping most creature comforts from hospitals, and drying up medical research. In some cases, this may hurt medical outcomes too. German breast cancer survival rates, for example, are a lot lower than those in the United States.  Furthermore, these insurer-centric systems haven’t exactly avoided the same long-term increase in medical costs that has taken place in the United States.

Indeed, experience in the U.S. and elsewhere shows that insurers are among the enterprises most resistant to innovation of any kind. The heavily regulated property and casualty insurance industry in the United States hasn’t produced a major new consumer product since modern homeowners’ insurance came on the scene in the 1960s.  While some new health insurance products—HMOs, Health Savings Accounts, and, now, “Accountable Care Organizations” established under Obamacare—have come into existence in the last generation, most have arisen from legislative mandates rather than genuine market demand.

With good reason, furthermore, insurers don’t want premiums going to underwrite someone else’s research and development costs and, with more power, would likely put the tightest squeeze on the big teaching hospitals which produce much medical research but, in many cases, end up with worse medical outcomes than smaller community hospitals. Simply giving more power to insurers could help to control medical costs. But, powerful or powerless, insurers themselves won’t drive medical innovation.

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