In his op-ed in the Washington Post this morning Ezra Klein points out something that’s very important to understand:
The Justice Department judges an industry “highly concentrated” if a single company controls more than 42 percent of the market. By that definition, 94 percent of statewide insurance markets are highly concentrated. A recent study by the advocacy organization Health Care for America Now showed that in Indiana, WellPoint controls 60 percent of the insurance market; in Iowa, Wellmark accounts for 71 percent; and in Alabama, Blue Cross/Blue Shield holds 83 percent. In the past 13 years, there have been more than 400 corporate mergers involving health insurers.
There are several important facts packed into that statement. First, state by state is the correct way to consider the insurance market. That’s because insurance is regulated by state agencies whose requirements differ.
Second, the insurance market in most states is an oligopoly dominated by a market leader, the remainder of whose members engage in a kind of passive collusion. The leader sets prices; the followers follow suit.
What Ezra doesn’t mention is that this state of affairs is an artifact. The nature of state insurance regulation boards favors oligopoly. For one thing, it takes a large company to meet the requirements imposed by the state agencies and for another bigger companies have a much easier time in dealing with the state agencies.
But Ezra does point out something it’s important to keep in mind. These state by state oligopolies mean higher prices in health insurance than we might otherwise see:
Economics textbooks tell us that concentrated markets reduce the competitive behavior that benefits consumers and lead to outsize profits for the dominant firms. Predictably, health-care premiums shot up more than 90 percent between 2000 and 2007, while the profits of the 10 largest insurers increased 428 percent over the same period. Clinton had promised us managed care within managed competition. Instead, the insurers took control of our care and managed to effectively end competition. Neat trick.
There’s a host of things that I disagree with in Ezra’s post. The influence of insurance companies is felt most strongly in the individual insurance market, not in the corporate insurance market. As I noted yesterday, the greater proportion of company healthcare insurance plans are self-insuring. While the insurance companies may participate as third-party administrators, they aren’t risk bearing and their fees are based on perverse incentives.
I don’t think that the solution to this problem is getting the federal government into the insurance game on a state by state basis. The problems with that are not negligible. Do the states have the power to regulate federal agencies? If they don’t, the federal government’s insurance company will operate under different rules than private insurance companies do. If they do, it’ll be a first.
My preference would be for a re-definition of illegal monopoly and monopoly power that takes the situation in the insurance industry into account. And for regulators to look at mergers with a much more jaundiced eye.
Of course, one of the best ways of dealing with a monopoly is to refuse to buy the product at all. For that reason, compulsory Obamacare will both steal liberty from the 45,000 uninsured while raising the price and lowering the quality of the resulting monopoly insurance.
Jimbino,
There is no monopoly at work. Oligopoly is not a monopoly. Lets try to stick to basic definitions.
Dave,
Managed competition is pretty much the same thing as state regulatory agencies. They reduce compeition. To many technocrats competition is seen as “wasteful”, “damaging”, “counter productive”. Why if we simply formed a “team” and worked together we could get so much more done. We’ve tried the “team” approach” and look at the results, higher prices and…shockingly…higher profits. Whodathunkit.
We want more competition not less. Take for example doctors. The number of new doctors is controlled. You’ve pointed this out yourself. Control the supply at a lower level than otherwise would occure and you raise prices. Neat trick, as Ezra would say.
Restriction of supply takes place all through healthcare. Requiring certificates of need reduces the number of hospitals and effectively grants hospitals geographic territories. Patents reduce competition among drug manufacturers (that’s their whole point).
The way the FDA approves pharmaceuticals is an effective subsidy to large manufacturers at the expense of smaller ones. And so on.
Note that I’m not necessarily advocating that we change all of these things, just pointing out the effects they have on supply and prices.
It seems more likely to me that reduced competition stems from the territories of competition, not the states. When my small business asks an insurance broker for quotes, we usually get about six. One of the questions we almost always ask about an unfamiliar insurance provider is whether the plan would cover hospitals and doctors in the area. Sometimes the answer is “maybe, but the patient would need to get the doctor pre-approved by filling out paperwork.” In other words, you sign up without knowing what to expect. There are 2 or 3 that would say yes because they have worked the area and they can provide an up-to-date glossy booklet showing all of the providers in the PPO.
It is the artificial segmentation of health care providers on a state by state basis that is the problem. There should be a national definition of what health insurance means ( to avoid cases where people are scammed into paying hefty fees for little coverage), and then a removal of state barriers so any insurance company can sell coverage in any state they want. That will increase competition with little or no government expenditure. It is much like they did 25 years ago with phone companies – and look what happened to prices.