04/04/2010 05:12 am ET | Updated May 25, 2011

Can We Fix Health Plans?

Are health insurers interested in building a better mousetrap? If they came up with one, would consumers beat a path to their door?

These questions are provoked by a recent Massachusetts study concluding that health insurance costs are rising because insurers are being forced to pay what seem to be abnormally high reimbursement rates to hospitals that have banded together to get greater bargaining power.

It is fleshed out by chronically entertaining health blogger Maggie Mahar, who points out that the same procedure can cost twice as much when the provider has market clout without any improvement in result.

Massachusetts and Mahar apparently think that the government should do something to reduce the payments involved and thus ease premiums. On a theoretical basis, markets could achieve this. I wonder why they don't.

Imagine a world where an insurer creates an innovative and inexpensive new product that only includes good, low-priced providers. They'd put together a network that would exclude many of the elite hospitals that demand big fees. Perhaps they'd only include one hospital in five. In an extreme case, perhaps the nearest in-network hospital would be 20-50 miles away. In New York, they might exclude all the high-priced dermatologists in Manhattan and require patients to visit physicians in the outer boroughs.

Clearly there would be some reduction in convenience. For consumers, though, this would be offset by a reduction in price. We could call this low-priced option something catchy like "managed care."

Would it work? The mere fact that those wiser and richer than I haven't tried it lately suggests not. Mahar explains why: "...competition doesn't work that way in health care markets. Most customers won't buy a less expensive plan if it doesn't include the "best providers" -- i.e. the biggest names -- in its network."

In other words, customers who are dissatisfied with the high costs of health care are willing to pay extra (dare we call it a premium?) for access to brand-name providers. They're like food stamp buyers unwilling to maximize their buying power by selecting generic house brands.

For those in the populist movement -- a bipartisan group that ranges from the tea baggers to those who rant at the power of big insurers -- this situation would seem to offer the possibility of action that didn't involve a government that they tend to be very suspicious of. They could simply demand a low-priced policy, use their petitioning skills to round up tens of thousands of people who'd pledge to buy it -- and then wait for the market to follow.

Who's to say it wouldn't? This theory isn't a whole lot more far-fetched than the other reform options kicking around. What's different about it is that it could be accomplished by the people without significant legislative intervention. If I understood why that hadn't happened, I'd probably better understand the current controversy and confusion.

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