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Competition and Concentration in Health Insurance
Many people have bandied about numbers suggesting that the market for health insurance is highly concentrated. Here is the President:
But these statistics only include people insured by "insurance companies" even though nationally just over half of all employees get their health insurance from a firm that self-insures. In other words, as John Lott points out, over half of the market for insurance is being left out of these concentration statistics.
Since about half of employees are insured by a self-insurer, concentration statistics--as typically presented --should be cut roughly in half (precise numbers vary by state). Firms that self-insure typically outsource benefits management and claim administration to highly competitive third party administrators. A key fact according to this paper (which is outdated although I wouldn't expect the basic finding to have changed) is that the populations served, the benefits paid and the premiums paid are about the same for firms that self-insure and firms that buy insurance from a health insurance company. Thus, concentration among that part of the market served by health insurance firms appears to be well disciplined by the larger market for self-insurance.
Posted by Alex Tabarrok on September 17, 2009 at 10:50 AM in Data Source, Economics, Medicine | Permalink
Comments
I would like to add that in many states, the largest insurer is a non-profit (not counting employer self-insuring). For example, in Alabama, Arkansas, Maryland, Massachusetts, Michigan, Rhode Island, and Vermont (amongst others), a non-profit company controls at least half of the market. So even if those markets are concentrated, it is by a firm that is not controlled by the evil profit motive.
So the concentration is lower than indicated and non-profits control much of them. The claims are all very misleading.
Posted by: TomB at Sep 17, 2009 11:12:17 AM
You are spot on as usual, Alex. I think the cable television companies could use your help as well. No argument (true or false) can withstand the power of data!
Posted by: Jon at Sep 17, 2009 11:13:25 AM
Your logic is flawed. I can't go and buy insurance from a self-insurer, so they are not in my consideration set.
All this says is, that with any monopolized market, the consumer always has the option of producing the service himself, even if this is grossly inefficient. The stronger the monopoly, the higher the price, and the more self-production will occur. Self-production will start with the subset of consumers who are relatively efficient at this, leaving the remainder of consumers facing the monopolist.
Posted by: a student of economics at Sep 17, 2009 11:17:17 AM
"in 34 states, 75% of the insurance market is controlled by five or fewer companies."
Why would such concentration indicate lack of competition? My guess is that five or fewer companies have market shares totalling 75% in dozens if not most consumer and industrial goods markets.
Posted by: John Dewey at Sep 17, 2009 11:21:47 AM
No, the logic is not flawed. There are all kinds of quasi-monopoly situations, in fact you'd be hard-pressed to name one that isn't.
The logic that a government monopoly combined with illegalization of self-insurance will increase choices is the flawed logic. It is so obviously flawed as to be a lie. Obama is a liar.
Posted by: Andrew at Sep 17, 2009 11:21:53 AM
This is only really viable for larger companies. Obama even specifically mentioned smaller companies and lack of bargaining power. Why do libertarians love favoring large corporations?
Posted by: yoyo at Sep 17, 2009 11:22:59 AM
Jon: Lot's of people make home movies and even have their kids put on hilarious, heart-warming skits, so the local cable company doesn't have a monopoly as long as you include this self-production.
Posted by: a student of economics at Sep 17, 2009 11:26:26 AM
Thanks! Why can't people see how flawlessly the health insurance industry is running due to near-perfect competition?
Posted by: Sam at Sep 17, 2009 11:29:18 AM
What's funny is that Obama is a supporter of single payer, because he thinks that things would be better if the government used monopsony bargaining power to lower prices in health care. Why he thinks that Blue Cross and Blue Shield of Alabama, a nonprofit with 90% of the market (as he defines it), would do a better job if they faced more competition is a mystery. Maybe the problem is that they're nonprofit?
I think the self-insures line is both accurate and misleading. My understanding is that firms that self-insure still use the networks and pricing established by the insurance companies. To the extent that Obama's complaint is that the insurance comapnies aren't driving down prices, firms that self-insure aren't relevant, or aren't relevant to the extent they piggy-back on pricing.
Posted by: Thomas at Sep 17, 2009 11:34:34 AM
If someone couldn't understand that there is a range between perfect competition and outright monopoly and it had to be one or the other, I might say that person might be a bit dense. I know people here aren't dense. I know Obama is not that dense.
Libertarians only favor large corporations over the megacorp, i.e. the government.
Posted by: Andrew at Sep 17, 2009 11:37:08 AM
It's not just companies, but individuals who self-insure.
In fact, it's interesting how millions of people with pre-existing conditions (like victims of domestic violence) are among the consumers who are most aggressive about "self-insuring".
They must be the major insurance companies fiercest competitors!
Posted by: a student of economics at Sep 17, 2009 11:37:26 AM
I don't have cable, so yes, I can punish the cable company. If I'm required by law to buy gov't insurance, I will not be allowed to opt out. In health I am currently highly self-insured. I have a helluva lot insurance, just not the kind the government would find acceptable, only the kind that is rational for me and my family.
AIG can fail and it would be painful whether or not the government bails them out, but at least they can fail if they do a terrible job. The government cannot fail without destroying many of us, that is why big corporations are better than the government.
If their intention was to coordinate choice and discipline the market, they would make efforts to build up self-insurance. They are going the opposite direction. They would create an exit strategy to ease the government out of the market. They have no such proposals. They would reduce or eliminate the current rules that favor large insurance companies such as inter-state marketing and fixed costs such as non-value-added regulations. They have not proposed anything of the sort. They are liars.
Posted by: Andrew at Sep 17, 2009 11:51:15 AM
yoyo,
Libertarians don't favor large corporations; modern liberals do however. In other words, the sorts of regulatory polices that modern liberals push favor large corporations.
a student of economics,
Lot's of people make home movies and even have their kids put on hilarious, heart-warming skits, so the local cable company doesn't have a monopoly as long as you include this self-production.
Well, and I realize you are trying to analogize here, but cable isn't the only option, Sat. TV is another. And of course as a practical matter cable TV isn't simply competing against Sat. TV or home movies; they are competing against a vast array of entrainment choices that range from what is on the internets to to Netflix to live performances to running in the local park.
Posted by: Seward at Sep 17, 2009 12:06:26 PM
Thomas,
Are you saying that non-profit BC/BS of Alabama with its 90% of the market is operating like a govt agency with a mandate that citizens be forced to use its services?
To me, being a non-profit means $ that would otherwise go to shareholders gets drained off by management in the form of cushy workplace arrangements.
Which is to say, it's nothing like a govt agency staffed by civil servants.
Or am I misunderstanding point?
Posted by: Cash at Sep 17, 2009 12:11:39 PM
If they wanted to really address concentration in the medical services market, they'd be talking about this:
http://www.ahrq.gov/research/ria19/expendria.htm
The High Concentration of U.S. Health Care Expenditures
Research in Action, Issue 19
Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount. Examining the distribution of health care expenses among the U.S. population sheds light on areas where changes in policy might bring about the greatest savings.
Are they talking about this? Hell no. And they don't want people talking about it because it undermines their moralizing on the issue. They want you to believe that all the little children aren't getting their shots.
So, the only problem is the irresponsibly uninsured. How could you deal with the uninsured? You could assess them a fee when the get service. Give them what amounts to a government loan against all future entitlements such as Social Security and medicare. There are of course issues here, but I spent about 5 minutes coming up with that, where the hell are the "experts?" Again, they are not so stupid that they don't know what the issues are.
Posted by: Andrew at Sep 17, 2009 12:16:50 PM
"To me, being a non-profit means $ that would otherwise go to shareholders gets drained off by management in the form of cushy workplace arrangements.
Which is to say, it's nothing like a govt agency staffed by civil servants."
Actually in my experience this sounds exactly like a govt agency staffed by civil servants.
The only difference is that the cushy workplace arrangements go to a broader set of emplyees in the govt agencies. Cushy benefits, inability to be fired, overstaffed and underworked, nice holidays, etc.
Posted by: eccdogg at Sep 17, 2009 12:27:46 PM
It's useful to point out that more concentration may occur in some states because each state has its own licensing and regulations for insurance companies to sell policies within the state. Thus, some states may be less attractive to insurance firms. In addition, federal law does not allow insurance to be purchased out of state. McCarran-Ferguson Act (1945),protects state insurance firms from interstate competition.
Posted by: Fran Smith at Sep 17, 2009 12:29:15 PM
wal-mart is a good example of a self-insuring firm, operating in every state and insuring thousands of employees. but this 'competition' hasn't exactly done wonders to improve the health insurance market.
i wonder why.
Posted by: endessous at Sep 17, 2009 12:30:58 PM
Of course, if we were really worried about concentration in insurance markets, we would allow cross-state selling of insurance which would not only reduce concentrated power by insurance companies but also state insurance bureaucracies.
Cash: To me, being a non-profit means $ that would otherwise go to shareholders gets drained off by management in the form of cushy workplace arrangements.
Which is to say, it's nothing like a govt agency staffed by civil servants.
Actually, it sounds to me pretty much exactly like a government agency once you replace the word 'shareholders' with 'taxpayers'.
Posted by: Slocum at Sep 17, 2009 12:36:40 PM
wal-mart is a good example of a self-insuring firm, operating in every state and insuring thousands of employees. but this 'competition' hasn't exactly done wonders to improve the health insurance market.
Huh? Evidence? Are we just supposed to assume "Wal-Mart is bad" even though you're saying that they provide their workers health insurance?
Wal-Mart has done wonders to improve the health insurance market, if you count lower prices on generics prescription drugs. (Not that they're the only large retailer with such a program.)
Posted by: John Thacker at Sep 17, 2009 12:43:30 PM
@John Thacker
"Wal-Mart has done wonders to improve the health insurance market, if you count lower prices on generics prescription drugs. (Not that they're the only large retailer with such a program.)"
Yah, the $4 generics and $20 flu shots are GREAT.
Posted by: Anonymous Coward at Sep 17, 2009 1:11:43 PM
As an antitrust lawyer who has defended hospitals and hmo's in mergers, I must say that, while I argue that Administrative Service Organizations and self-insurance is in the same "market" as prepaid insured healthcare plans, the enforcement agencies and the courts do not buy it.
I am shocked and disappointed that someone would try to pull the wool over your eyes with this argument, but I suspect people do what they have to do.
Here are some reasons why they may not be in the market:
1. I think you can see this in the report that is linked to the post by Alan Taborak, but self insurance (that is, taking the risk of your employees and buying some stop loss) is not much used by firms of less than 500 employees. Good luck if you are a small business employing 100 employees--your choice is the indemnity market...that is, the market with the 60 to 70% state share.
2. Many of the ASOs are the same insurance companies, for a good reason. They have developed the network of local providers who offer them a discount to be in the network. So, Blue Cross/BS runs both the insured side and the ASO side.
3. Today, indemnity insurance is a state market because of state insurance restrictions. The good part of Obama's plan is that it permits national plans to be offered...something to compete with local, state protected plans.
4. If you want to do your own research on this, go to the FTC and Antitrust Division website and look up some of the cases and complaints and you will get a better picture of how these markets are defined. Its a little more fluid than covered here, but not at all what the original post said. You guys should police this stuff better.
Posted by: Bill at Sep 17, 2009 1:16:40 PM
This non-profit for profit stuff is, pardon the expression, bs too.
Organizations with market power and with the ability to extract profit position can distribute the profit to shareholders, OR, if they are non-profit, can lavish it on their executives and managers. Although there is literature on the behaviour of for profit and non-profit hospitals in the exercise of market power, the consensus is that it does make a difference in terms of price/cost performance. But, as a lawyer, you still make the argument anyway and hope no one is doing their homework.
Posted by: Bill at Sep 17, 2009 1:21:02 PM
The post - and most comments - are predicted on an incorrect understanding of how self insurance works. It is a complex instituional structure, and the complexity matters.
First, as to the proposition that competition in the self insurance makret (through Third Party Adminitrators or TPAs) portects consumers who purchase fully funded insurance from (assumed to be) monopoly insurance suppliers; this is incorrect. The proposition presumes that consumers (in this case, firms) can economically switch between the alternatives and this potential switching disciplines the pricing of the monopolist. Most firms who do not self insure cannot economicallly do so. Thus, the amount of potential switching is not enough to protect the non-switchers. Think critical loss.
Second, it takes more than a TPA to self insure. A TPA just processes paperwork. To economically self insure the firm has to have access to a network of providers at good (discounted) rates. Some (many) firms provide both network access and TPA services. But most of these are in fact the same large insurance companies that are presumed to be a monopolist. It is incorrect to say that you can escape monopoly pricing by buying a similar substitute product from the same monopolist. There are other network access providers ("rental networks") such as Beech Street and PHCS. In many makrets, however, these rental networks providers in fact rent the network from (you guessed it) the dominant health insurers in the state. And, they pay a fee to the dominant health insurer to do so. (The dominant health insurer also has a business serving the self insured firms, so it is not keen to enable competition from other firms). It should not be a surprise that in many markets, the dominant supplier of fully funded insurance is also the dominant provider of self funded insurance services.
Finally, the "non profit" nature of many insurance companies (and hospitals) sould not be thought to ameliorate any market power concerns. I believe the evidence is pretty clear that non-profits in this sector behave a lot like for profits.
BTW, I generally do not think market power in health insurance is a problem (although it varies from state to state and I have not studied all states). But, the reasons stated above for why it is not a problem are - in my view atleast - mistaken.
Posted by: Greg at Sep 17, 2009 1:26:26 PM
Andrew observes:
"AIG can fail and it would be painful whether or not the government bails them out, but at least they can fail if they do a terrible job. The government cannot fail without destroying many of us, that is why big corporations are better than the government"
May I introduce you to fascism, Andrew?
Posted by: beezer at Sep 17, 2009 1:27:05 PM
