significant difficulty in obtaining reliable separate price quotes for, say, physicians’ services and prescription drugs when they are purchased directly by consumers as opposed to when they are paid by third-party insurers. In the medical care sector, the “law of one price” does not hold, making the BLS’s task of obtaining reliable distinct price quotes a challenging one.
Recent improvements in information technology and medical care claims processing have greatly expanded the scope of calculations that can be carried out by health insurance actuaries. Stimulated by these information technology and actuarial developments, as well as by the practical difficulties in obtaining accurate and reliable price quotes from third-party payers, the BLS is now examining whether the indirect method can be replaced by direct pricing of health insurance. Such a change would eliminate the need for price quotes from third-party payers for their purchases of physician services, hospital services, and prescription drugs. Implicitly, such direct pricing of health insurance policies would be based on the reasonable assumption that prices paid by insurers for physician services, hospital services, and prescription drugs are reflected in the health insurance premiums they charge. Although the panel had not initially intended to consider direct pricing of medical insurance policies, the BLS raised this issue in its discussions with panel members, and so we address it here in a preliminary way.
Although direct pricing of health insurance could in principle obviate the need for obtaining hospital, physician, and prescription drug price quote information from insurers, the difficult issues of adjusting properly for changing quality and health outcomes remain. Direct pricing of health insurance policies does not address issues of adjusting medical care prices for quality changes. Those problems will be present whether direct or indirect pricing of health insurance takes place.
One major reason for year-to-year movement in health insurance premiums is that the mix of covered risks changes. This mix of covered risks reflects variation in the incidence of illnesses (e.g., AIDS or a flu epidemic), the age-sex mix of the insured population, and changes in the selectivity of coverage (i.e., the mix of individuals who have chosen a particular health insurance policy). The health economics literature is rife with examples of how moral hazard, adverse selection, and adverse retention affect costs (see, e.g., Altman et al., 1998). The presence of these phenomena significantly complicates the task of pricing health insurance.
In theory one could use hedonic pricing techniques (discussed in Chapter 4) to control for variations in health insurance benefits offered and for the age-sex mix of the covered population. In practice, it would be difficult if not impossible to adjust health insurance premium variations for changes in the health status of people who have selected to enroll in that plan. Whether actuarial procedures have improved sufficiently to be able to generate accurate quotes for a frozen or fixed population is unclear to the panel. Moreover, since the Laspeyres index methodology involves fixing product bundles at base-year levels, with base years