Paper by economics, medicine faculty named best of 2011 in health economics writing

Researchers at The Center for Health Care Research and Policy, a joint program by MetroHealth and Case Western Reserve University School of Medicine, recently were honored with the Arrow Award for the best paper in health economics in 2011. The International Health Economics Association described their research paper, “Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance,” as “important, innovative and policy-relevant.”

Published in American Economic Review, the paper was co-authored by Randall Cebul, director of the center and professor of medicine, epidemiology and biostastics; Mark Votruba, associate professor of economics and medicine; James Rebitzer, former faculty member; and Lowell Taylor, professor at Carnegie Mellon University.

The paper concluded that small businesses overpay for health insurance because they are unable to compare the value of insurance policies. Because small companies have difficulty comparison shopping for health insurance, the marketplace doesn’t dictate pricing and insurers can set prices at any rate they choose.

The name for this problem is “search frictions,” and this study marks the first time this theory has been applied to the health insurance market. The authors estimate that frictions raise premiums for small employers by an average of 27 percent and increase turnover by about 64 percent for the average health insurance policy.

“You’re going to have a hard time finding your best health plan, so you’re always searching for a better option,” Cebul said. “The result is that many small companies switch health insurance carriers frequently, which also drives up their costs.

“High turnover reduces the incentive for health insurers to invest in preventive services and other chronic disease management programs because these types of programs take longer to produce a return on their investment,” he added.

Another hindrance to comparison shopping is the cost of marketing insurance plans. Once marketing costs are added to the plan, shoppers can count on even higher prices that aren’t related to the product alone. So there’s no way to tell what a policy is actually worth.

“If consumers have difficulty judging a product’s value, competition becomes more about marketing than about creating high-value products,” Votruba said.

Under the federal health reform law, states must now create individual health insurance exchanges, which are being designed to help individuals and small businesses comparison shop and choose health insurance plans for employees. If individual states decline to establish these exchanges, the federal government will establish one for them.