What you have is a really simplistic model of how private enterprise actually works. And what you need to understand is that economics is primarily driven by incentives, both for the individual and for the company. The only way to get different behavior out of actors in the economy is to offer different incentives, either naturally or by government fiat. Let me give you an example.
The health insurance company's bottom line profits are determined entirely by the volume of cash that they funnel to healthcare. Their profit margins are capped by law to X% of this volume. So the only way they grow year over year is to increase the amount of cash they hoover up and direct to healthcare providers. Because the stock market demands year over year growth, they are incentivized naturally and by fiat to increase the volume of cash that flows through their network. This volume of cash is directly spent on healthcare. So you can see pretty easily that the incentive structures in our society are geared toward raising costs steadily.
If you couple that with private equity buying up healthcare providers and globbing them together, then you can see that there's a whole market system being built to make healthcare more expensive so that health insurance providers can absorb more costs and therefore increase their year over year profits. PE companies increase the negotiating power with insurance companies, and costs increase. And when costs increase, the insurance company's profit increases proportionally year over year.
So what you're saying about private companies doesn't make any sense. There doesn't even have to be collusion, although United Healthcare, an insurance provider, owns Optum, a healthcare provider, and I suspect there is a lot of collusion in relationships like that. The incentives are perfectly aligned to create this situation.
That's not quite how the actual incentives work. Most commercial insurers (both for-profit and non-profit) are increasingly adopting the "payvider" business model pioneered by Kaiser Permanente. As health plans pressured network providers to cut rates, the providers responded with M&A activity (some financed by PE) to gain more negotiating power. In some regions there are only a couple large health systems left that dominate the local market. Like in the SF Bay Area, health plans are pretty much forced to have Sutter Health in their networks in order to maintain adequate coverage. So now the only lever that health plans have left to control costs for their customers (i.e. large employers) is to hire clinicians directly as employees and cut out the middleman. UnitedHealth Group has been particularly aggressive about this strategy but all of their major competitors are taking similar approaches.
The health insurance company's bottom line profits are determined entirely by the volume of cash that they funnel to healthcare. Their profit margins are capped by law to X% of this volume. So the only way they grow year over year is to increase the amount of cash they hoover up and direct to healthcare providers. Because the stock market demands year over year growth, they are incentivized naturally and by fiat to increase the volume of cash that flows through their network. This volume of cash is directly spent on healthcare. So you can see pretty easily that the incentive structures in our society are geared toward raising costs steadily.
If you couple that with private equity buying up healthcare providers and globbing them together, then you can see that there's a whole market system being built to make healthcare more expensive so that health insurance providers can absorb more costs and therefore increase their year over year profits. PE companies increase the negotiating power with insurance companies, and costs increase. And when costs increase, the insurance company's profit increases proportionally year over year.
So what you're saying about private companies doesn't make any sense. There doesn't even have to be collusion, although United Healthcare, an insurance provider, owns Optum, a healthcare provider, and I suspect there is a lot of collusion in relationships like that. The incentives are perfectly aligned to create this situation.