In the spring of 2010, President Obama signed the Patient Protection and Affordable Care Act (PPACA), commonly known as Obamacare, which initiated significant changes to the U.S. healthcare system. Though this legislation is still considered controversial by some, its impact can already be felt in many aspects of healthcare.
"With the new healthcare law, the states as well as the federal government will likely use a competitive bidding process for the provision of private and public insurance contracts," says Pallab Sanyal, an information systems and operations management professor at George Mason. "However, currently, open electronic markets for procuring health insurance are relatively unknown. Based on theoretical developments in electronic market design over the past decade and the knowledge developed from a failed endeavor in the early 2000s, we offer several recommendations that policy makers can use to design a sustainable market for procuring health insurance."
Sanyal, with Alok Gupta and Stephen Parente from the University of Minnesota, examined health insurance procurement in their article, "Future of Health Insurance Procurement: Lessons from the Online HMO Auctions," published in the December 2012 issue of International Journal of Health Care Finance and Economics. Their research provides insights on designing an auction mechanism for procuring health insurance.
"An auction, in this context, can be defined as the process of procurement via competitive bidding," explains Sanyal. "Billions of dollars of government purchases are almost exclusively made in this way, and the practice is widespread in businesses as well."
Using an auction, companies can attempt to reduce healthcare procurement costs for their employees by having HMOs compete in open electronic auctions. Though such a market was tried out between 1999 and 2001, Sanyal explains that the mechanism had several fatal flaws, and as a result had to be discontinued.
In their research, Sanyal and his coauthors present five design changes that can result in a more sustainable market mechanism for health insurance procurement. The recommendations stem from observed flaws in the previous auction system.
"One flaw in the system was that there were a lot of different options and components of the insurance plan and the commodities were not standardized," explains Sanyal. "Another was the nonbinding nature of the auction, a true winner was not determined through the auction."
Sanyal and his colleagues believe that these flaws in the previous system discouraged competitive bidding and proved to be ineffective in generating cost savings for the employers.
The proposed design changes aim to make negotiations between employers and healthcare insurance providers more efficient. These changes include standardizing the elements of benefits design, requiring insurers to submit quality assurances for the health plans prior to the auctions, and requiring the employers to quantify their required quality parameters.
According to the National Association of Health Underwriters, the majority of Americans have group health insurance coverage through their employer or the employer of a family member. An annual survey by the Kaiser Family Foundation found that in 2012 premiums for employer-sponsored health insurance averaged $5,615 a year for single coverage and $15,745 for family coverage. The employee's share of the premium averaged $951 for individual coverage and $4,316 for family coverage.
Sanyal says, "Well-designed procurement auctions can play an important role in fostering a competitive insurance industry leading to cost savings for the employers and lower insurance premiums for the employees."
Pallab Sanyal is an Assistant Professor of Information Systems and Operations Management at the School of Business, George Mason University. He received his Ph.D. in Information and Decision Sciences from the Carlson School of Business at University of Minnesota. His primary research interest lies in designing advanced electronic market mechanisms such as combinatorial auctions. Click here for full bio.