What is the Barrier to Entry?

Over at the Daily Kos, Markos argues that it is the greed of the insurance companies that is part of the reason for skyrocketing health care costs. Markos quotes the article linked above,

Medical malpractice insurers in recent years have reaped a windfall in premiums that have far outstripped their claim payouts, a report issued by consumer groups said Thursday.

The report, written by former Missouri Insurance Commissioner Jay Angoff, contends that the amount of premiums collected by 15 major medical malpractice insurers has more than doubled over the past five years. At the same time, the report found that the companies’ claim payouts have remained essentially flat […]

The report said malpractice insurers as a group raised their net premiums between 2000 and 2004 by 120.2 percent, to about $4.2 billion, even though their net claim payments rose by only 5.7 percent, to about $1.4 billion.

As a result, the amount of claim payments made as a percentage of premiums dropped from 69.9 percent in 2000 to 33.6 percent in 2004.

Okay, this says to me that either the insurance companies are earning quite a bit in terms of profits or there is something else that is absorbing the extra revenue. If it is profits, then how come more firms aren’t moving into this highly lucrative business? What is the “barrier to entry” that is allowing malpractice insurance companies to raise their rates, earn high profits and not face increase competition from new entrants? Or is there something else that is sucking up that additional revenue?

My guess is that we are only getting part of the picture here. Granted, the malpractice insurance companies might be the evil, greedy and corrupt entities that Markos claims, or then again maybe not. For example, does the “claims” cover court costs? As Megan McArdle notes, defending a weak case that the doctor eventually wins also costs money, and probably just as much as cases where the doctor is indeed at fault. So what is at work, a bad policy that is creating a barrier to entry or something else that we aren’t being told?

FILED UNDER: Economics and Business, Health
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. herb says:

    In all my years, I have never seen an insurance company go belly up. I have also never seen a yearly published financial report from an insurance company. I have only seen higher rates.

  2. jpe says:

    The received wisdom is that the insurance companies lost money in the market. Their reserves are so huge that much of their profit comes from the investment income on those reserves.

    That’s the standard narrative, at any rate.

  3. Steve Verdon says:

    Herb,

    I’ve never seen a quark either.

    jpe,

    Hey, the story Kos is spining might be right, I just can’t tell from what he has posted. If he is right, there is most likely a barrier to entry…what is it, and should we get rid of it?