Incentives of insurance companies

Propublica published an interesting piece explaining why health insurers might actually not mind high prices from healthcare providers. In theory, the insurance company (the payer) wants to minimize its cost so that it can maximize its profits or at least offer more competitive offerings to its customers. The explanation for payers' acceptance of high prices is that while the profit in any given year is determined by the absolute difference between revenues and costs, the long-run profits of payers can essentially be modeled as a percentage of their total premiums collected. If true, the long-term incentive of insurance companies is not so much to minimize the absolute costs; rather, they benefit more as the costs rise from year to year.

Interestingly, the Affordable Care Act set a maximum percentage of premiums collected that insurance companies can use for non-medical purposes (including profits). In a non-competitive market with that regulation, insurance companies would indeed benefit from higher healthcare costs. Also interesting is the online resource that the article mentions in helping employees of certain companies shop for healthcare. Insurance companies could be rolling out their own versions of such tools, and one wonders why those tools are not more prevalent among insurance companies.