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How hospitals could kill the health insurance industry

CNBC logo CNBC 8/6/2017 Jake Novak
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Some of the world's most powerful retailers have been brought to their knees in recent years thanks to the "Amazon effect." The internet juggernaut has simply been able to provide almost all the goods consumers can buy more conveniently and has effectively taken over the retail industry. It appears people like Amazon (AMZN) founder and CEO Jeff Bezos saw this opportunity all along, and precious few retail investors saw it coming.

But is there is a similar disruptive event on the horizon here in the U.S. when it comes to something just about all of us have to buy? When it comes to the controversial and increasingly all-consuming market for health insurance, the answer appears to be "yes." And playing the role of Amazon in this scenario is none other than the ever-expanding and powerful U.S. hospital industry.

On its face, health insurance as it's used today in this country is built on a strange business model.

Insurance plans are generally used as a hedge against major or unpredictable losses. And long ago, the bulk of the health insurance business was based on that model, with plans sold as a hedge against unexpected and major medical costs like emergency surgeries.

But the general rise in all health care costs and the fact that comprehensive health insurance coverage is now mandated by Obamacare have conspired to make health insurance a very different kind of product. Now, the primary purpose of health insurance is to serve as a middleman to defray the costs of certain or near-certain events like regular medical checkups and common medical procedures.

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But just because so many of us are convinced we need health insurance sold by an insurance company, and just because that's the way the politicians think of things, what's to stop another industry from offering the same protections more conveniently or maybe even at lower prices?

Nothing it seems. In fact, hospitals, which provide the lion's share of America's health care, have already started to sell health insurance plans. Obamacare's private exchanges made that easier to do logistically, but the biggest impetus is the fact that hospitals have been consolidating and increasing their reach over every aspect of health care from acquiring private practice doctors' offices to operating nursing homes and rehab centers.

It's a simple case of an industry that provides every health care service deciding to cut out the middle man.

The financial results for many of the hospitals that started offering insurance plans since 2010 have been a mixed bag. Certainly, they're not as strong as the stellar profits traditional health insurance companies have enjoyed in that time. But one major hospital system CEO, Michael Dowling of Northwell Health in New York state, says this new business plan is a "long term play."

He and his peers may not have to wait too long if Obamacare's generous direct and indirect subsidies are cut by the Trump administration or some kind of Congressional reform of the ACA. And with several insurance companies deciding to exit Obamacare exchanges even with those subsidies in place, the hospital industry may soon find itself playing in a much less crowded field.

Hospitals could also simply start to offer customers significant discounts for using their plans or perhaps even stop accepting certain competitor insurance plans altogether. It all depends on how ruthless they want to be, but no one can deny they have the power to do it. After all, they control the actual product customers ultimately want: health care. And health care and health insurance are two different things.

But it would be naive not to consider one factor that could keep the status quo in place for a longer time. That would be the fact that insurance companies and hospitals have a symbiotic relationship that helps perpetuate the hospitals' ability to control prices and the insurance companies' ability to convince almost everyone in America that they need their product.

It works something like this: Hospitals continue to have the most leverage when it comes to setting and raising prices for all kinds of care. But the insurance industry helps mitigate the potentially disastrous response to hospital price increases because people who have insurance don't pay full price.

In fact, most of us don't know the actual price of any treatment at the hospital. Imagine running an industry that has the power to raise prices without having to deal with public outrage when those prices are raised because its prices aren't published.

That's the advantage most hospitals have in no small part thanks to the insurance industry. You may know what you're paying in monthly premiums or what comes out of your paycheck to pay for health insurance. But you have to wait until you get medical treatment and then get an itemized statement from your insurer to find out what the list price of that treatment was.

The insurance industry gets its justification to exist by selling the idea that only it can help make those mysterious health care costs affordable. So when hospitals raise prices, it's very good news for them and the insurers who serve their patients.

But again, the implosion of Obamacare in so many parts of the country is already putting the private insurance industry in jeopardy. When and if the bean counters figure out a way that hospitals can do better without the private insurers around, it's hard to see why they wouldn't simply sweep them away faster than Amazon put an end to your local book store.

Commentary by Jake Novak, CNBC.com senior columnist. Follow him on Twitter @jakejakeny.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.

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