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