Something interesting has been happening to healthcare costs in America since Barack Obama's Affordable Care Act (ACA) was passed in 2010.
They have stopped racing upwards, and are now growing less quickly that the US economy itself. The slowdown is occurring even as the healthcare needs of American baby boomers increase, and the rollout of Obamacare "health insurance exchanges" may be the reason.
US households can go to ACA insurance exchanges and compare prices for several standardised levels of health insurance. Insurance prices are being pressured by that process, and insurance groups are responding by looking more closely at the prices they pay on claims for healthcare services.
Here in Australia, healthcare costs are lower. As the privatisation of Medibank Private cranks up, managing director George Savvides is arguing however that his company is capable of producing a similar pressure on healthcare providers, using what might be thought of as a private exchange that resembles the "dark pools" that exist in financial markets.
It is going to be an important part of his sales pitch, because about 87 per cent of the money health insurers spend goes to healthcare contractors in claims payments. Savings there are potentially much more significant than ones that can be delivered by cuts in operating costs: they they could push Medibank's profits up, and health insurance premiums down.
The World Bank estimates that health expenditure in the US was 17.9 per cent of gross domestic product between 2009 and 2013. It was 9.1 per cent of GDP in Australia over the same period, and the US is the one that is out of line. Healthcare costs in Germany, France, Japan, New Zealand, Canada and Switzerland are between 10.1 per cent of GDP and 11.7 per cent of GDP, for example.
Between 2010, when the Affordable Care Act was passed, and 2012, US health expenses grew at an average rate of only 1.1 per cent a year, however. Growth in the three years to the end of 2013 is estimated to have been 1.2 per cent, the lowest three-year growth rate on record, and less than a third of the long-term growth rate of 4.6 per cent a year.
There are forces at work that President Obama can't take credit for. They include a decline in demand for medical services during the global economic crisis, and a decline in the rate of development of new, expensive, patent-protected prescription drugs.
The ACA and the insurance exchange network it is creating may, however, be doing to US healthcare costs what Amazon.com and online retail price comparison sites have already done to retail prices – making the lowest price more easily discoverable, pushing prices down across the board, and creating margin pressure for insurers that is being passed on to suppliers: wholesalers in the case of the retail industry, hospitals and other medical providers in the case of the healthcare system.
According to the Obama administration, the ACA has reduced healthcare cost inflation by half a percentage point a year since its introduction. It also appears to be improving America's budget outlook. Since August 2010, America's Congressional Budget Office has cut its projections of combined outlays on Medicare (for retirees) and Medicaid (for low-income families) by 13 per cent, or $US168 billion. The CBO predicts that the ACA will cut US budget deficits by about $US100 billion in its first 10 years.
There is no direct equivalent of Obama's health insurance exchanges here. Health insurance coverage options are more diverse, and the industry leader, Medibank, does not allow its offers to be quoted on private sector health insurance comparison sites, for example. Health insurers also do not reveal details of the deals they do with health service providers, on the grounds that they are commercially and competitively sensitive.
Savvides is already saying, however, that once Medibank is privatised it will be cracking down on supplier charges. It knows where to exert pressure because it is big enough to already have its own "dark pool" – one that compares supplier prices instead of insurance plan prices.
Investors have so far focused on Medibank's operating expense ratio. At 9.2 per cent, it is above the Australian industry average of 8.8 per cent. Medibank will be more profitable if it gets costs down to the industry average.
About 87¢ in the dollar the health insurance industry pays in claims in this country is payments to healthcare providers, however. And with 29.5 per cent of the market, Medibank has an extensive view of where the money is going.
It sees significant price and service efficiency variation from state to state, for example – variations that Savvides believes will deliver major profitability gains if they are ironed out.
I don't think there's much doubt that Medibank is big enough to see where pricing and service quality differentials exist in Australia.
What's less clear is whether it has enough power to pressure its suppliers to charge less, or as much of an incentive to do so as US insurers, who are seeing their own health insurance prices being squeezed by Obama's insurance exchanges. Savvides will presumably explain more about how Medibank can cut the cost of the services it pays for through claims as the privatisation sales process advances.
