Economies of Scale In Health Care?

In health care size make no difference……or does it?

By Bill Rusteberg

Does the power of large numbers make a difference in the cost of health care? In Texas there are some who believe so, with many counties, school districts and other political subdivisions joining association programs such as the Texas Association of Counties (TAC ), Texas Municipal League (TML) and TRS ActiveCare (TRS).

While legitimate arguments can be made either way, the bottom line all should agree is that in health care the economies of scale are not as great as common sense dictates.

Why? Let’s examine.

Whether a small group of 400 employees lives or a mega monster group of 250,000 lives, size makes no difference in claim reimbursement methodologies in the manged care world. Since claims take up 90% of total spend, with no difference in payment strategies, economies of scale have no effect other than the remaining 10% of plan spend.

For example, let’s suppose the small group above has United HealthCare while the mega-monster group has United HealthCare too. Both groups seek care from the same provider network. Plan members in either group are reimbursed exactly the same regardless of their respective size.

But what about the power of large numbers minimizing the effects of large catastrophic claims? A group of 250,000 lives can much better absorb a $500,000 pre-mature baby claim than a measly group of 400 employee lives!

Wait, that is not necessarily so. Both groups have pooling points, or stop loss insurance to pool large claims over many more lives in a carrier’s book of business. And, often times even the big carriers re-insure their book of business with insurers around the world. It is not uncommon for a fronting carrier to cede risk to 5, 10, 15 or more carriers for the same risk.

Ah, now that is the power of large numbers! Despite difference in size, both groups discussed here enjoy equal economies of scale, even though one is a measly 400 life case out in Little Rabbit, Texas.