Argument: Public insurance stimulates competition in a non-competitive industry

Issue Report: Public health insurance option


John Holahan and Linda Blumberg. “Is the Public Plan Option a Necessary Part of Health Reform?” Urban Institute: “The arguments around the public plan too often ignore what we believe is the central reason for including a public plan as a component of reform: that health insurance markets today, by and large, are simply not competitive. And as such, these markets are not providing the benefits one would expect from competition, including efficient operations and consequent control over health care costs. We believe that the concentration in the insurance and hospital industries that has taken place over the past several years has been a significant contributor to this problem. The role of the government plan is to counter the adverse impacts of market concentration and, in doing so, slow the growth in health care costs. In this paper, we first describe problems with competition in current insurer and provider markets, in particular focusing on the implications of consolidation in both markets. We then discuss how a public plan could help address these problems. Next, we examine how a public plan might be structured and how much money a plan might save. We address how large the public plan would be and what impact it would have on the current private insurance industry. We then examine the most common arguments against the public plan. We conclude by arguing that private insurance more effective controlling health care spending. Competition in Insurance and Hospital
Markets Economic theory offers a clear description of the characteristics of competitive markets.
These include the following:

  • Many buyers and sellers participate in the market for a particular good.
  • Buyers must be able to make comparisons on price and characteristics of the goods that are offered by the various sellers. Sellers should be able to freely enter or exit the market.
  • Economic profits are driven to zero in equilibrium (i.e., all income is devoted to paying for the inputs used in the process of production.
  • Each buyer and seller takes the market price as the outcome of competition; in other words, they cannot determine prices. Health insurance markets very often lack these characteristics. First, in recent years, there has been a great deal of consolidation among health insurers. Robinson (2004) found that in 36 of the 50 states, three or fewer insurers accounted for 65 percent of the commercial market in 2003. Thirty-four states had values of the Herfindahl-Hirschman Index (a measure of market concentration) that exceeded federal guidelines that deem industries of anti-trust concern (Holahan and Blumberg 2008). According to a 2008 analysis in 42 states and 314 metropolitan statistical areas (MSAs) done for the American Medical Association, consolidation among insurers continues. Ninety-four percent of the MSAs studied were highly concentrated according to Department of Justice/Federal Trade Commission standards. In 89 percent of MSAs, one health insurer had at least 30 percent of the commercial health insurance market, while one insurer had at least 50 percent of the insurance market in 15 entire states (American Medical Association 2008)”

“Democrats Weigh the Calculus of Public Insurance”. Washington Post. August 7, 2009: “Many experts, such as Linda Blumberg and John Holahan at the Urban Institute, say a public plan is essential to fiscal responsibility in a country where health-care spending has soared to $2.4 trillion per year. A public option such as that proposed by House Democrats, with prices initially set at 5 percent above Medicare rates but well below private insurer rates, would inject competition into markets that are now oligopolies: An American Medical Association study found that a single insurer controls more than half the market in 16 states and a third of it in 38 states.”

Richard Kirsch, National Campaign Manager for Health Care for America Now! “Three Reasons for the Choice of a Public Health Insurance Plan”. May 15, 2009: “Choice. Currently, private health insurance companies enjoy monopoly power in most markets. That means that you (or your employer) likely only have one or two insurance plans to choose from. With so few choices, it’s not surprising that many find their health insurance doesn’t meet their needs, or are squeezed by rising costs without any other options. The insurance industry’s monopoly is bad for your health and your wallet.

A public health insurance option will give everyone in America a true choice. If for whatever reason you become dissatisfied with your current insurance, you will be able to switch your coverage to the public health insurance plan, which will guarantee your premiums will be affordable and your benefits will meet your needs. Your bank account will be happy, and you’ll have your health.”

Zachary Roth. “Heath-care market characterized by consolidation, not competition”. Talking Points Memo. June 29, 2009: “But the notion that most American consumers enjoy anything like a competitive marketplace for health care is flatly false. And a study issued last month by a pro-reform group makes that strikingly clear.

The report, released by Health Care for America Now (HCAN), uses data compiled by the American Medical Association to show that 94 percent of the country’s insurance markets are defined as “highly concentrated,” according to Justice Department guidelines. Predictably, that’s led to skyrocketing costs for patients, and monster profits for the big health insurers. Premiums have gone up over the past six years by more than 87 percent, on average, while profits at ten of the largest publicly traded health insurance companies rose 428 percent from 2000 to 2007.

Far from healthy market competition, HCAN describes the situation as “a market failure where a small number of large companies use their concentrated power to control premium levels, benefit packages, and provider payments in the markets they dominate.”

So extreme is the level of consolidation, in fact, that one former top Federal Trade Commission official working with HCAN has sent a letter to the Justice Department’s Antitrust Division, asking for an investigation into the health insurance marketplace.”