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Are health insurance markets competitive?
Probably not:
Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently face higher premium growth, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers' switching costs, and insurers exploit this inelasticity where they have sufficient bargaining power. Given the rapid industry consolidation during the study period, these findings suggest healthcare insurers possess and exercise market power in an increasing number of geographic markets.
Here is the paper. Here are ungated copies; I am not sure they are the exact same draft.
Posted by Tyler Cowen on January 2, 2009 at 02:47 PM in Medicine | Permalink
Comments
Now here's the million dollar (or rather, trillion dollar) question: can healthcare markets be made competitive? And, if so, at what cost relative to adopting a single-payer model?
Posted by: Robert Olson at Jan 2, 2009 3:01:41 PM
My (private) health insurance premia increased >30% YoY.
Posted by: meter at Jan 2, 2009 3:03:31 PM
Should this surprise us? How many markets are truly "competitive" in the Econ 101 sense? I'd actually appreciate a response from someone (even Tyler Cowen) who is more familiar with similar studies in other industries. My intuition suggests that very few markets have "perfect competition" given firm concentration (oligopoly), branding/product differences (so there's not really a perfect market for a commodity), or probably a million other things. So shouldn't the response to this study be, "duh...of course that's right"?
Posted by: BD at Jan 2, 2009 3:32:29 PM
Health Insurance isn't competitive because Healthcare isn't competitive. It starts with the
entry-limiting cartels known as medical societies (I'm not advocating just anybody hanging out
a shingle-just taking the power of market entry away from those who stand to gain from it), then
there's the costs of feeding the parasites in the trial bar (John Edwards, et al), the interference
of state and federal governments (ever wonder why that "snazzy" scooter is likely to be free?).
Didn't we just learn that risk isn't eliminated when its diffused?
Posted by: Superheater at Jan 2, 2009 3:59:01 PM
I propose that this is the problem:
"not subject to reporting requirements"
Information is an incredible tool for enforcing competition, to the point where the retail sector finds itself with more-or-less standard pricing because consumers are able to research prices on the internet. Everything from TVs to bath soap begins to look a lot like the book industry, with a pre-determined price practically printed on the package (and the spoils going to the retailer with the biggest buying power).
Information asymmetry is a big problem in a bunch of different sectors: the unions' open vote, government auditing, and my t-mobile bill. I would think that correcting the asymmetry would be the first step in creating competition.
Posted by: AJ at Jan 2, 2009 3:59:57 PM
@BD
I think it's generally assumed that there are never situations with no asymmetries of information, transaction costs, etc.
I mean, even when Neanderthals barter rocks for meat, how does the guy who hands over his stuff first know the other guy will just refuse to give his stuff in return?
Perfect competition, in my understanding, is more of a theoretical construct than an actual reality or even possibility. Rather we gauge competitivness on a relative basis (i.e. how has the internet brought down transaction costs and reduced information asymmetries from 1990 to today).
But I'm just a 2nd year economic geography student so you experts have my permission to pick my opinion apart.
Posted by: Economic Geography at Jan 2, 2009 4:05:55 PM
And by "will just refuse" I mean "won't just refuse"
Posted by: Econ Geography at Jan 2, 2009 4:08:17 PM
Segregation of health-insurance markets due to state-level regulations on health insurance probably makes price discrimination a lot easier.
Posted by: Garrett Schmitt at Jan 2, 2009 4:14:04 PM
1) As Garret mentioned, state level regulations enable price discrimination. They also hinder transparency and create completely unnecessary bureaucracies -- both for the states and for the health insurance firms. Time to extend the reach of the interstate commerce clause... and have federal standards and not state by state ones.
2) Mimic the auto insurance industry in that health insurance should be a mandatory purchase. In this country, and in almost every state, if you drive a car, you must purchase insurance. The creates incredible competition among car insurers. In addition, car insurance is at the forefront of offering incentives for good behaviors because they know it helps their bottom line. For example, student with good grades usually pay lower rates. If you don't get into accidents for so many years, your rates go down, etc... Imagine if this was applied to health insurance?
3) Unlike Car Insurance, we're talking about humans here. Thus, those who are unable to pay the premiums could have governments chip in. Furthermore, pre-existing condition dilemma could be solved similarly to how some states deal with workers compensation insurance. In some states like New Jersey, new companies get put into a pool and they are randomly assigned to a company to audit and manage. This way private firms would not be unfairly burdened, but at the same time states are not responsible for managing health care.
I think the goals of any health insurance plan in this country should support:
1) Competition among insurers
2) Safeguards and methods for supporting the poor and currently sick.
3) Encourage innovation
The third point in very important. While the American system of health insurance sucks in many ways, compared to many other countries I've lived in American Health is by far the most advanced. I would hate to see a single payer government run system if we could avoid it....
Posted by: Robert at Jan 2, 2009 5:16:37 PM
In this country, and in almost every state, if you drive a car, you must purchase insurance.
The creates incredible competition among car insurers.
How is competition created or advanced when instead of being persuaded to buy a product,
you are forced?
Having said that I gladly buy high limit insurance to keep the trial lawyers awy from my house.
Posted by: Phil at Jan 2, 2009 5:36:49 PM
Superheater,
risk isn't eliminated when its diffused
I think everyone should repeat this ten times before they go to sleep. The information asymmetries that cause risk in the medical field don't go away when they are transferred from patient to voter or politician. The question should be, which group is most able to deal with these asymmetries in ways which maximize the patient's utility?
It seems to me that lack of competition can't be the issue. There are plenty of industries with less competition (though without legal barriers to entry). For a long time, Intel had a virtual monopoly on CPUs, yet their products kept getting cheaper and faster. Now there is Intel and AMD, and things are still improving at a good clip. Clearly the threat or possibility of competition is often enough, and the lack of it certainly can't explain rising prices.
Posted by: Grant at Jan 2, 2009 6:09:58 PM
My age clicked over a decade and I got the whammy! (The really difficult study would compare plans as performed in practice, as opposed to as promised.)
Posted by: odograph at Jan 2, 2009 6:58:28 PM
Perfect competition?
I certainly don't want commodity health care. Just because other people aren't capable of discerning quality and bargain hunting, I don't want my family to be penalized.
Posted by: Andrew at Jan 2, 2009 7:52:27 PM
Grant, I think that you're missing the key point about the threat of competition. Intel always had to worry about a competitor arising, and then one did. Do health insurance companies fret about new competitors? I doubt it.
Posted by: jason kerwin at Jan 2, 2009 10:54:56 PM
The incentive systems are all screwed up. Patients have to go with the insurer that their employer mandates, regardless of how they are treated. Insurers try their best to avoid paying for medical procedures, but it's doctors who are harmed by this, not the patient. Doctors try to do as many procedures as possible, but it's the patient, not the insurer, that takes the fall.
Basically, you have the patient, the insurer, and the doctor. In every combination, A gets to decide how much B screws over C, rather than having his actions feed back on himself. No wonder the market is screwed up.
One way to fix this would be to have doctors bill by time, not procedure, and have insurance be an after-the-fact reimbursement of a percentage of the costs. If a doctor does too many procedures, they eat the costs and the patients go elsewhere. If the insurer fails to pay up on time, the patient picks another insurer. THAT's the way the free market is supposed to work.
Posted by: a_c at Jan 2, 2009 11:12:12 PM
a_c,
You have it right on. Who gives us employer-subsidized health insurance?
The left says our current system is crap, calls it the free market, and then pretends to throw up their hands and says, "well, we tried, I guess we need single payer." Sounds familiar.
Posted by: Andrew at Jan 2, 2009 11:56:17 PM
And the right says our current system is the best, calls it the free market, and insists covering 'those others' is socialism.
Posted by: Lord at Jan 3, 2009 12:13:40 AM
a_c is correct that the incentives are all screwed up. Neither doctor nor patient has much incentive to reduce the cost of healthcare because the majority of the cost is borne by the patients employer. The insurance company and the employer both have a great deal of incentive to reduce the cost of care but neither has much power to do so.
Severing health insurance coverage from employment would be a good first step. Insurance companies would then be forced to compete more directly for insureds and would be more responsive to their needs. Patients could also be made more directly accountable for the future cost of their insurance but this would have to be balanced in some way to prevent insurance companies from selecting only the patients without serious medical conditions.
Posted by: John at Jan 3, 2009 12:17:48 AM
jason kerwin,
It certainly takes a lot of capital to start a new health insurance company, but it also takes a lot of capital to start a business like AMD. I'm sure the barriers to entry in the insurance market drive up prices, but I can't see how they would be the cause of prices increasing each year.
Posted by: Grant at Jan 3, 2009 12:31:12 AM
a_c,
Why not have doctors bill by results? When you take your car to a mechanic, you don't drop it off with no idea of what the cost will be. He gives you a quote (and unless you're familiar with the mechanic, you probably get a few more quotes), and if the job ends up costing more then he takes the fall. If he completes it ahead of time (i.e., he makes better use of scarce resources) he profits more.
Why wouldn't the same thing work in medicine? When cars break, many people have no idea what is wrong with them, just as in medicine. Yes repairing them can be a pain, and yes its hard to find competent mechanics (I think due to the complexity of their business and people desire for cheap repairs), but prices don't go up every year. Payers rarely care about the procedures or tests used, because mechanics have incentives to economize those.
Its certainly not a perfect industry (especially without any sort of consumer ratings of mechanics), but I think its a model worth considering. Of course, such a setup is probably illegal in a number of different ways.
Posted by: Grant at Jan 3, 2009 12:37:06 AM
This reminds me of a study I did a few years ago on the competitiveness of the office furnishings market. I investigated whether cubicle accessory suppliers, latinus porcus, sold higher-margin furniture to more profitable firms. I found a statistically significant relationship between Aeon chair levels and firm profictability. In particular, positive profit shocks led to a significant overshoot of Aeons the following quarter, with number of chairs often exceeding number of office staff. Measures of other higher-end office furnishings showed a similar relationship to firm profitability.
......
Seriously, folks, isn't the "Duh!" here that we, as a society, have valued health care insurance as a premium item? And so, if a firm is more profitable, what better way to share some of the profit than provision of pricier health plans? That they may not be more valuable is irrelevant. And possibly, they may be more valuable than duding up the cubicles, or purchasing outdoor art for the company HQ, or the 1001 other ways that firms fritter their extra profitability away.
Posted by: Bob Knaus at Jan 3, 2009 10:02:58 AM
"While the American system of health insurance sucks in many ways, compared to many other countries I've lived in American Health is by far the most advanced. I would hate to see a single payer government run system if we could avoid it.... "
My brother, who travels to Europe regularly due to his work, tells me most of the Europeans he deals with purchase health insurance to aviod their government programs. They don't want to wait months for care. And a co-worker of his took a Canadian girl friend to a US hospital emergency room due to the canadian doctors not wanting to deal with her problems - basically she had to self diagnose and then they would give her perscriptions.
Posted by: rmark at Jan 3, 2009 11:38:17 AM
rmark:
Yes, it is important to remember that 'universal healthcare' is an economic system, not a medical system. In reality, both markets and socialism are just tools to deal with scarcity. The scarcity still exists under 'universal healthcare' (in fact, it is often worse), which means that just as many if not more people end up being denied healthcare under 'universal' systems as under market systems.
What 'universal healthcare' protects people from is financial ruin from health problems. The person without insurance in the U.S. receives the most advanced cancer treatment in the world, but then goes bankrupt... the person in Canada receives treatment more along the lines of what was the norm in the U.S. 10+ years ago (if they survive the waiting list), but they don't have to worry about being financially devastated.
I prefer better care and whatever financial sacrifices that come with it, but I can see why some people prefer the second option.
Posted by: Rex Rhino at Jan 3, 2009 12:29:28 PM
Economists have a unique blind spot with health care in that they expect more competition to be meaningfully impact costs. In fact one of the paradoxes in health insurance is that more competition cuts profits/admin but more insurers means they have less bargaining power vs providers and costs go back up as hospitals and physicians take higher profits.
Hawaii stumbled across *an* answer to this paradox. For-profits are taxed out of competitiveness and the non-HMO market is dominated by a single non-profit company (local BC/BS) that leverages that market share into low fees for its members. This is why Hawaii's marketplace features high quality mandated coverage at among the lowest costs in the nation.
The converse solution -- having the government fix provider fees and using large scale competition to control profits -- might also be workable but government price setting typically is much less efficient and scales poorly.
Posted by: Steko at Jan 3, 2009 8:14:45 PM
Jason Kerwin:
Grant, I think that you're missing the key point about the threat of competition. Intel always had to worry about a competitor arising, and then one did. Do health insurance companies fret about new competitors? I doubt it.
Having worked for a private insurer and as a state Medicaid/Medicare auditor, I can tell you they very much do. Employers routinely make changes in plans and in carriers. There's fewer competitors in the procurement of government providers, for two reasons- 1.) You have to be big enough to cover a significant enough geographic area to be worth considering and; 2.) You have to have enough folks prepared to respond to multi-HUNDRED page RFP's and contracts.
In both arenas, competition is fierce. There's a basic assumption underlying a lot of posts here that the intensity of competition is solely related to the number of market participants-that's simply not true. There's intense competition in the semiconductor industry (as pointed out) even though there's only Intel & AMD (ok, VIA's out there too but...) and Intel's market share is high (and likely to get higher with the introduction & proliferation of the Core i7 CPU ).
Posted by: Superheater at Jan 4, 2009 2:31:02 AM
