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. Read more

Health Reform & The President

Courtesy of the American Presidency Project, a collaboration between John Woolley and Gerhard Peters at the University of California, Santa Barbara, we bring you this “Special Message to the Congress Proposing a National Health Strategy” delivered by the President of the United States– Richard M. Nixon, February 18, 1971.

Nearly 40 years ago, and I am struck not so much by the money and imprimatur heaped upon the HMOs as the next best solution (though, considering the problematic result, the compelling and laudatory rhetoric has a sort of disconcerting affect),  as I am struck by the familiarity of the language–and the problems. The piece is relatively long so I’ll leave you, somewhat uncharacteristically,  utterly to your own impressions.

A final note: The Bureau of Labor Statistics through its “Inflation Calculator,” shows that $1.00 in 1971 had approximately as much buying power as $5.25 in 2009. The calculator uses the Consumer Price Index (CPI) which includes “medical care.” However, as Mr. Nixon readily notes below, the inflation rate for medical care has surpassed the CPI over the years.

The American Presidency Project

John T. Wooley & Gerhard Peters
University of California at Santa Barbara

Richard Nixon Special Message to the Congress Proposing a National Health Strategy
February 18, 1971

To the Congress of the United States:

In the last twelve months alone, America’s medical bill went up eleven percent, from $63 to $70 billion. In the last ten years, it has climbed 170 percent, from the $26 billion level in 1960. Then we were spending 5.3 percent of our Gross National Product on health; today we devote almost 7% of our GNP to health expenditures.

This growing investment in health has been led by the Federal Government. In 1960, Washington spent $3.5 billion on medical needs–13 percent of the total. This year it will spend $21 billion–or about 30 percent of the nation’s spending in this area.

But what are we getting for all this money?

For most Americans, the result of our expanded investment has been more medical care and care of higher quality. A profusion of impressive new techniques, powerful new drugs, and splendid new facilities has developed over the past decade. During that same time, there has been a six percent drop in the number of days each year that Americans are disabled. Clearly there is much that is right with American medicine.

But there is also much that is wrong. One of the biggest problems is that fully 60 percent of the growth in medical expenditures in the last ten years has gone not for additional services but merely to meet price inflation. Since 1960, medical costs have gone up twice as fast as the cost of living. Hospital costs have risen five times as fast as other prices. For growing numbers of Americans, the cost of care is becoming prohibitive. And even those who can afford most care may find themselves impoverished by a catastrophic medical expenditure.

The shortcomings of our health care system are manifested in other ways as well. For some Americans–especially those who live in remote rural areas or in the inner city–care is simply not available. The quality of medicine varies widely with geography and income. Primary care physicians and outpatient facilities are in short supply in many areas, and most of our people have trouble obtaining medical attention on short notice. Because we pay so little attention to preventing disease and treating it early, too many people get sick and need intensive treatment.

Our record, then, is not as good as it should be. Costs have skyrocketed but values have not kept pace. We are investing more of our nation’s resources in the health of our people but we are not getting a full return on our investment.

BUILDING A NATIONAL HEALTH STRATEGY

Things do not have to be this way. We can change these conditions–indeed, we must change them if we are to fulfill our promise as a nation. Good health care should be readily available to all of our citizens.

It will not be easy for our nation to achieve this goal. It will be impossible to achieve it without a new sense of purpose and a new spirit of discipline. That is why I am calling today not only for new programs and not merely for more money but for something more–for a new approach which is equal to the complexity of our challenges. I am calling today for a new National Health Strategy that will marshall a variety of forces in a coordinated assault on a variety of problems.

This new strategy should be built on four basic principles.

1. Assuring Equal Access. Although the Federal Government should be viewed as only one of several partners in this reforming effort, it does bear a special responsibility to help all citizens achieve equal access to our health care system. Just as our National Government has moved to provide equal opportunity in areas such as education, employment and voting, so we must now work to expand the opportunity for all citizens to obtain a decent standard of medical care. We must do all we can to remove any racial, economic, social or geographic barriers which now prevent any of our citizens from obtaining adequate health protection. For without good health, no man can fully utilize his other opportunities.

2. Balancing Supply and Demand. It does little good, however, to increase the demand for care unless we also increase the supply. Helping more people pay for more care does little good unless more care is available. This axiom was ignored when Medicaid and Medicare were created-and the nation paid a high price for that error. The expectations of many beneficiaries were not met and a severe inflation in medical costs was compounded.

Rising demand should not be a source of anxiety in our country. It is, after all, a sign of our success in achieving equal opportunity, a measure of our effectiveness in reducing the barriers to care. But since the Federal Government is helping to remove those barriers, it also has a responsibility for what happens after they are reduced. We must see to it that our approach to health problems is a balanced approach. We must be sure that our health care system is ready and able to welcome its new clients.

3. Organizing for Efficiency. As we move toward these goals, we must recognize that we cannot simply buy our way to better medicine. We have already been trying that too long. We have been persuaded, too often, that the plan that costs the most will help the most–and too often we have been disappointed.

We cannot be accused of having underfinanced our medical system–not by a long shot. We have, however, spent this money poorly–re-enforcing inequities and rewarding inefficiencies and placing the burden of greater new demands on the same old system which could not meet the old ones.

The toughest question we face then is not how much we should spend but how we should spend it. It must be our goal not merely to finance a more expensive medical system but to organize a more efficient one. Read more