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.
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?
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”?
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.
And by “will just refuse” I mean “won’t just refuse”
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….
Superheater,
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.
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.
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.
And the right says our current system is the best, calls it the free market, and insists covering ‘those others’ is socialism.
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.
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.
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.
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 ).
Thank you very much for such a good and informative post. You are putting forward a very good question and every one should read this article and think on it. Thanks for the sharing. You really did a very good job.
Can someone please explain what the phrase ‘that risk isn’t eliminated when it’s diffused’? I can almost get a grasp on it, but just curious about the context and a sample.
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