Healthy Competition? How a Competitive Health Insurance Market Influences Cost
With the Obama administration’s brisk movement on health care reform in recent weeks, there is an increasing amount of dialogue about the administration’s desire for a government-based public insurance option. Advocates of the “public plan” argue that a government option would force private insurers to compete on price and quality. A common refrain from those opposing a public plan is that such a plan would leverage government capital and regulatory power to bargain down prices, which would decrease competition and consumer choice by overpowering private insurers. Since market competition is a resonating theme throughout the current discussion of health care reform, it would be constructive to discuss what we currently know about the role of competition in the health insurance market.
The American Medical Association found that, in 2008, 94% of the markets for health insurance were highly concentrated. By itself, this figure may not be troubling. However, in that same year, a survey by the Kaiser Family Foundation found that wages had grown by 29% whereas the average insurance premiums had grown by 120%.
Two questions arise. First, how does consolidation in health care markets affect consumer cost? Second, how does increased consolidation in health care markets affect the quality of care? This post will focus on the first question. A subsequent post will concern the role of competition on the quality of care delivered.
With regards to cost, a widely cited study by Wholey et al. found that a larger number of HMOs is related to lower HMO premiums. Specifically, Wholey found that highly competitive markets with 17 competitors and 45 percent HMO market penetration had 11% lower premiums than those with average competition. For additional findings see also this study. In their 2008 testimony regarding the potential Highmark BCBS and Independence BCBS merger, the University of Pittsburgh Medical Center analyzed data from the AMA and the Department of Justice, finding that states possessing a greater diversity of market participants have, on average, 12% cheaper premiums.
However, it would be incorrect to presume a simple relationship between cost and competition. For instance, one study found that there is a competitive influence of increased HMO penetration on non-HMO premiums, and that increased HMO penetration can slow the rate of growth in addition to simply decreasing costs.
Moreover, the ability of a competitive marketplace to lower costs can be explained by factors other than the increased leverage of insurers in concentrated markets. A subsequent study by Wholey revealed that mergers between HMOs lead to unexpected costs and dis-economies of scale for the merged company, which may increase cost downstream. Accounting for the complex lingering effects of marketplace consolidation on the price of insurance would appear to be crucial when crafting reform legislation, particularly when determining whether a public plan is necessary to combat the entrenched consolidation that currently exists.
One factor making competition particularly complex is that insurers said to be competing in a given market may not always be truly competing. The benefits offered by HMOs can differ greatly between plans, and increased competition may lead insurers to further differentiate their products. Therefore, an increase in the number of insurers may not increase consumer choice, and may in fact lead to unintended consequences that could be counter-productive.
Competition has also been found to directly affect the employer-provided health insurance market. A 2008 study by Leemore Dafney found that insurers in less competitive markets have an increased ability to raise premiums for a firm’s plan, even without providing the firm with any increase in benefits. Employer reluctance to switch was in part explained by the cost of switching, as well as by the ability of insurers in non-competitive markets to take advantage of their position.
The increase of consolidation and the decrease in competitiveness inevitably raise questions about anti-trust enforcement. Interestingly, Thomas Greaney of the University of St. Louis Law School points out that this lack of anti-trust enforcement may be the result of a conscious decision by the government to allow the managed care sector to counterbalance the increasing power of providers. Professor Greaney highlights a troubling approach that, if left unchecked (as appears to be the case) will likely spur providers to further consolidate in response to increased insurer concentration, resulting in a back and forth cycle of consolidation.
Unfortunately, the issues regarding competition have been over-simplified or simply ignored. On Face the Nation this past weekend, Senate Majority Leader Mitch McConnell stated that the public plan would “essentially crowd[] out of the private market all the competition that we have among insurance companies today.” Instead, McConnell advocated “dealing with [] things like litigation reform, things like wellness programs. That’s one thing I think we can all agree on.” There are, however, two things that are more difficult to agree on, namely, whether the competition Senator McConnell refers to presently exists, and how the measures advocated by McConnell would serve to increase competition.
I am interested to read the second installation in the series regarding the services “provided” by the “public plan.” Since the debate has been completely entrenched in rhetoric, as the “public plan” has yet to be described in any substantive terms, I have heard backlash regarding the future decline in the quality of care that will be a product of such a plan. This is most disheartening as insurance never provides care, but merely reimbursement for care provided for by physicians. I look forward to reading how you discuss the rhetoric on both sides regarding care. I would also be interested to see how the physicians at the AMA meeting in Chicago, which President Obama recently addressed, responded to allegations of reduced quality of care.