Competition in the Health Insurance Marketplace and its Effect on Quality: Intriguing Findings Should Influence Reform Debate

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In a previous post I discussed the relationship between the competitiveness of health insurance markets and the cost of insurance. Though the inverse relationship between competitiveness and cost is not unexpected, the studies revealed a complex relationship between the two variables that should be taken into account when reforming our health care system.

In that prior post, I promised to follow up with a discussion of current knowledge concerning the relationship between competitiveness and quality.  Much of the research out there is conflicting. This is somewhat unexpected, as one would assume as a matter of basic market economics that greater competition would force plans to compete on quality. However, as Professor Frank Pasquale has pointed out, there are a variety of activities that insurers engage in to compete, such as “cream skimming” or “cherry picking” their customer base, denying coverage based on preexisting conditions, and remaining largely opaque in their operations. In other words, it appears that a great deal of the competition seems to take the form of mitigating exposure to cost risk.

Instead of competition playing an important role in improving quality, the biggest impact may be the level of HMO penetration. Below I will provide a brief explanation of the “tools of the trade” used in these studies, as well as a brief description of some recent findings.

It is not uncommon to hear that “a public plan is needed because there is no competition in the marketplace” or conversely that “the public plan will destroy the competition that presently exists between private insurers.” Regardless of which of these statements may, or may not, be correct, there is a lingering question that must be answered: how do we know what level of competition exists, and how does competition affect the quality of health care?

Competition

There are three main ways that researchers measure competition in the health insurance market. One way is to simply count the number of insurers in a given market. This method, though instructive in some measure, may give the same weight to an insurer with a few policies as it does to one with a 100,000. Another method is to utilize the Herfindahl-Hirshman Index (HHI).  Simply put, HHI is an index based on the sum of the squares of the market share percentages of the competitors.  If the market share is primarily focused in one competitor, while scattered throughout the rest, then the HHI will tend to be large, since squaring that one large participant’s share greatly increases the resulting sum. Alternatively, squaring the shares of many smaller market participants produces a smaller HHI sum. Thus, a lower HHI corresponds to, at least in theory, a more competitive marketplace.

There are, however, problems with the HHI index. As mentioned in my prior post, health insurers often offer a variety of plans, many of which offer different benefits and heterogeneous provider networks. Therefore, even if a market’s HHI is numerically low, the HHI formula may nevertheless inflate the degree of competitiveness. In other words, we may not be comparing apples to apples.

A third way to look at competition, Read more