A Public Health Plan and Competition

The purpose of a public plan, according to its advocates, is to assure a competitive marketplace. The result will be lower costs, they argue, because a government-run health plan will keep private carriers honest.

Senator Charles Schumer, speaking at a rally sponsored by Health Care for America Now!, put it this way, “A public health insurance option is critical to ensure the greatest amount of choice possible for consumers. We believe that it is fully possible to create a public health insurance plan that delivers all the benefit of increased competition without relying on unfair, built in advantages.”

If  a public plan is to provide competition, the question is: what does a competitive market look like? Is it three carriers slugging it out? Six? Ten? A report by the folks at Health Care for America Now! says the “U.S. Justice Department considers a market ‘highly concentrated’ if one company holds more than a 42 percent share of that market.”  But “highly concentrated” does not automatically result in anti-trust objections by the federal government. It’s a factor, but it’s not a determinative factor.

Competition is lacking in some states. The Government Accountability Office has tried to determine the competitive landscape in the small group market (not an easy task given differing definitions and variations in reporting methodologies). In a letter to several Senators on the subject of “Private Health Insurance: 2008 Survey Results on Number and Market Share of Carriers in the Small Group Health Insurance Market” the GAO reported that while there were, on average, 27 licensed carriers in a state, the median market share of the largest carrier was about 47 percent. Further it found that the combined market share of the five largest carriers in a market was 75 percent or greater in at least 34 states and was over 90 percent in 23 of these states (only 39 states provide sufficient information to determine the market share of its top five plans, so the actual number of states in these categories could be higher). The lowest combined percentage of market share held by the five largest carriers was 56 percent in Wisconsin according to the GAO.

The disparity among the states was substantial. The GAO study found that in Arizona the largest carrier has a market share of about 21 percent; in Alabama the leading carrier controlled 96 percent of the small group market. Even the most ardent capitalist should admit that Alabama is not a competitive market

The American Medical Association does. They publish competitive information on the commercial health-insurance market. I was unable  to find a description of the methodology to use this determination, and the AMA study includes large businesses, unlike the GAO study that focused on small groups). The AMA study found a paucity of competition. As reported by Business Week, the AMA claims that “in 15 states one insurer has 50% or more of the entire market.”  In a somewhat confusing statement, Business Week, reports the AMA as claiming that “out of 314 metropolitan markets, 94% are controlled by one or two companies, or fewer.” (I’m not sure what’s fewer than “one or two companies” — what does a half company look like? )

The AMA concludes that this means there’s no competition among health carriers, a somewhat predictable determination given their relationship with the carrier community. “These findings, coupled with higher insurance premiums, higher profits, lower scope of benefits and high barriers to entry, leads to the conclusion that health insurers are exercising market power in many parts of the country.”

Thus, claim public plan proponents, arises the need for government-run health insurance plan. But will the mere presence of a public plan increase competition. In Alabama, the answer is no doubt “yes.” With one small group carrier enjoying 90 percent market share the entry of a new player would certainly bring greater competition. In Wisconsin, where five carriers split 56 of the market and the largest carrier has a 32 percent market share, a public plan would be just one more choice among many.

The problem with the “public plan ensures competition” argument, in my view, is that it applies a national solution to regional problems. In some states and regions more competition is needed. In others where four or five carriers are already slugging it out, the public plan — if it competes on a level-playing field as lawmakers promise — contributes little.

Some government-run medical plan advocates claim the difference will be that a public plan will lack the profit motive of existing carriers. But there are already non-profit competitors in the small group market. In California, two of the top four competitors are non-profits. The addition of another is unlikely to change much.

It is true that premiums have skyrocketed in recent years. The Business Week article notes that, according to the Kaiser Family Foundation has found that health insurance premiums have increased 120 percent in the past 10 years. General inflation increased by 44 percent during that period. The AMA concludes this is the result of anti-competitive actions taken by carriers.

Another likely reason, as pointed out in the article, is that hospitals and other health care providers have commensurate power. “A 2006 study found that one or two hospitals controlled the market in 88% of the nation’s large metropolitan areas.” It goes on to quote Karen Davis, president of the Commonwealth Fund, as saying “’You’ve got a dominant insurer up against a dominant health-care provider … That just doesn’t work out well for lowering costs.’”

What this suggests is the most effective way for a public plan to lower medical costs is to impose MediCare-type pricing on doctors and hospitals. This, however, would violate the pledge of lawmakers to maintain a level-playing field between the public plan and private carriers.

Why this matters is that MediCare pays less than the actual cost of many medical services. Hospitals and doctors shift this shortfall to commercial carriers. If the government-run health plan did the same the cost shift would be brutal, driving many of those carriers out of the market — not because they couldn’t compete on a level playing field, but because the playing field was not level.

The messy legislative process is moving toward a solution that addresses the competition issue without incurring the consequence of additional government coverage cost shifting. The consensus is Congress is moving toward the idea of regional health insurance co-operatives (albeit not without loud cries of anger from liberal and other supporters of a government plan). An advantage of co-ops is that they can more easily address disparities in competition across the country as opposed to a national health plan that would treat the country as a whole. Based on the GAO report, for example, one might expect co-ops to do well in Alabama, but have a much tougher time getting established in Wisconsin where the need for them appears to be less.

The debate over a public insurance plan would be more straightforward if it focused on the real issue: should the government offer coverage at lower prices resulting from imposing reimbursement fee schedules on doctors and hospitals. That’s unlikely to happen, however. When it comes to health care reform the public trusts doctors and hospitals and they don’t trust insurance companies. Consequently, ignoring the fact that a lack of competition among carriers is a local, not a national, problem is good politics. But it makes for an awkward public policy debate.

21 thoughts on “A Public Health Plan and Competition

  1. No one that I have read here or anywhere else for that matter has mentioned that the #1 priority of the government right now is what is causing the steep increases in the cost of healthcare?
    This is the most important element about healthcare to be addressed!

    I was involved with installing the first major medical program that was installed for unions in Wva. And Virginia . And it made tons of money for the unions by the end of a 2 year period, which had to then be spent for additional programs ie. eyecare, dental etc. an early example of the early healthcare waste in this country.Until the lawsuit issues about medical care are solved, the selling of medicine by our drug companies to other countries, the profits of large hospitals to afford the building of additional large suburban hospitals and on and on medical costs will continue forever. More but what good does it do?

  2. Very good post. Free market capitalism encourages health insurance companies to consolidate with the strong absorbing the weak. The natural consequence of such behavior over time has been regions in which one or a few carriers dominate. In effect they have monopoly power and use that power to raise premiums (where else ya gonna go?) and reduce payments to physicians and hospitals (whatcha gonna do about it?). A single payer system is nothing more than a government sanctioned state owned monopoly that will do the same.

    We have a precedent in our country in which we have allowed monopolies: utilities. But we regulate them, particularly their ability to raise prices (state utility commissions).

    State health insurance commissions could be one way to go. Allow the strong and more efficient insurance carriers to dominate, but limit their ability to abuse their pricing power.

    For more health care reform thoughts, check out

    http://jkallman.wordpress.com/

  3. The precept that a “public plan” is needed to ensure competition is simply flawed. Just think how that reasoning could have been applied in the past. We do not have enough competition in the steel industry so the federal government starts a steel business. Or you could apply that to railroads or in today’s terms computer operating systems.

    Second, the government can do one thing no private industry can do….PRINT MONEY and run up astronomical debt. A private company has to have capital reserves to underwrite risk.

    Third, I have a problem with the government demonizing profits. The last time I checked profits encourages competition and innovation.

  4. I think an issue that is often overlooked is the in-network issue. The reason that one carrier might dominate in Alabama is that they have the greatest affiliation with the dr’s and hospitals there. Why would I buy insurance from a small company that has no presence. If the same hospitals were forced to accept at least three to five carries then perhaps this would increase competition.

    • Some states have adopted “Any Willing Provider” legislation that attempts to underscore the type of restrictive contracts that you cite. Such legislation requires facilities to accept patients for care independent of whether they have a contract with a particular insurance carrier.

      • Doesn’t “any willing provider” require insurance companies or MCO’s to accept into their networks any provider willing to abide by the terms of the contract and accept the agreed upon fee schedule? While this seems like a good thing, it does restrict MCO’s from building networks based on quality and efficiency.

  5. Hi Alan, Thank you for your blog. It has been a calming influence in a trying time. My first comment is I know that some of the companies in CA call themselves “non profit”, but that a little misleading since they are non profit after paying huge salaries to their officers.

    My question is, if the goverment plan bases it payments to hospitals and doctors on what Medicare pays, what would stop the private carriers from doing the same? Would that not eliminate any “unfair” advantage?

    • Why can’t we try this: Let the government define the coverage and the exclusions. This takes away the “apples and oranges” game that insurance companies have played in the past. Let the government do quality and price surveys and publish the results for any enrollee to see. Once you stop the shell game on coverage and exclusions, the only thing left is price and service. Score cards will drive enrollees to the insurance companies that have the best service and best price.

      Our government has not demonstrated that they can control costs in the Medicare system. There is amazing waste in this system….so what would be different if they took control of the rest of the system?

  6. The beautiful thing about a public plan is it can ignore premium taxes, income taxes, mandated benefits, cost of capital, licensing fees, graduate medical education surcharges (NY), state department of insurance compliance and lots of other mundane costs. Come to think of it, maybe we should just give the private plans a pass on these things too?! You should read Robert Reich’s article in the wsj.com on why we need a public plan. His argument is basically guys like Ron Williams (CEO Aetna) are lazy and run fat, inefficient organizations; but the government can motivate him to get lean. You can see how clueless they are in the ivory tower.

  7. It would seem reasonable that if the two main goals of the health care reform initiative were to reduce the cost of health insurance and to increase competition in the health insurance market, a simpler plan than the proposed government “option” could accomplish these goals. Goal #3, getting the American public significantly closer to universal coverage would be achieved by accomplishing these 2 goals, as more people could then afford insurance and more employers would be able to afford health coverage for an increased number of employees. I have written about need to eliminate useless consumption of health care resources before, and I am certain this can be achieved as long as political conflicts of interest do not get in the way. As for increasing competition to regionally-dominant insurers, there have to be ways to create incentives for new insurers to enter an under-served region in a free-market environment. At the same time it should also be possible to create disincentives for an insurer to remain or strive to become regionally-dominant. Is it reasonable to regulate a dominant plan, one with greater than say 40% of market share, as a de facto public utility while allowing other plans to come in and thrive with fewer financial constraints? To me this seems reasonable. I look forward to reading more on ways to augment competition in the marketplace without a government plan being in the mix.

    Maybe I’m still somewhat naive on this subject, but I know that I do not trust the House or Senate bills as presently constructed, and I, like everyone else, would like a solution that provides a bright, sustainable future for health care in the U.S. while serving as a stimulus for American employers to create jobs with health benefits.

    • Given Bill Stapleton’s astute observations about the government plan’s advantages, wouldn’t it be more likely that any private competitor would have to maintain a large market share to have any hope of surviving. I’d expect increased mergers until one or two private plans remain in any attractive local market. Outside large metro areas no one will have the scale to compete with the government.

      • I believe Bill Stapleton’s tongue was firmly implanted in his cheek when he made his comment. The point is, and this has been very well illustrated by Alan, is that the government plan as currently designed would not be operating on a level playing field with the private insurers. It would have the backing of the taxpayers no matter how much it spends or how inefficient it may run, and it can unilaterally decide its non-negotiable reimbursement rates. It would drive the private insurers out of business even if they were run by non-corruptible altruists. Yes, economies of scale would be needed to have a chance at competing with a behemoth government-run health plan, but this too would likely not succeed. The problem with this is the type of health care system we would be left with, and the likelihood of an undesirable impact on the American economy and public health.

        • Nosedoc, Tongue in cheek or not, Bill’s points are likely true if there is a government plan. You don’t really think the Feds are going to be regulated by the states, do you?

          I’ve posited some plan features on this site and others that I think would negate the “need” for a government plan, but in reading parts of the House Bill on required plan features and pricing have come to believe the private alternative will have to be so expensive (not being able to do what Bill points out the Feds can)that we will slide down the slippery slope to a single payer. And when I say expensive, I’m taking about the medical cost part of the price alone, not considering administrative expenses let alone some profit.

          I hope the insurance industry et. al. wakes up and fights this thing. Where are Harry and Louise when we need them!

        • David, I agree with you. I vigorously oppose the government-run option as well.

          Here’s an interesting article from today’s NY Times on what is going on with the insurance industry (you need to sign up first if you haven’t already–it’s free):

          http://www.nytimes.com/2009/08/05/health/policy/05insure.html?_r=1

          Put this article in the context of what Alan was talking about in his last entry about Speaker Pelosi, and I think it’s fairly obvious that she and the more left-wing Democrats are so determined to have this government-run option that they are trying to paint the entire industry as the creation of Satan. I think Pelosi is frustrated by the fact that the industry is still at the table, despite the fact that the industry is recognizing that it needs to change in order to survive in the long term. She wants government-run, single payer at all costs.

        • Whether it’s a national plan or a series of regional co-ops the plan will evolve to something like the following.

          After the first ninety days congress will shout form the rafters how well it’s working and how financially sound it is. This may continue through the first year. Sometime between 18 and 21 months a report will leak out that this plan(s) is bleeding money and benefits, fees (i don’t know if it will be called premium, taxes or fees)or reimbursements will have to change.

          Remember the same folks who are singling out the health insurance industry are the ones who contributed to the problem by slashing Medicare reimbursements and putting the shortfall on the backs of the health insurance industry. To think they can solve the problem seems rather odd.

          In the NY Times this past Sunday a White House staffer talked about the administrations goal of having basic health care for all. This was as interesting as hearing the President switch the conversation from health care reform to health insurance reform. I don’t think these are subtle shifts I think they are significant. I don’t think anyone knows what is meant by either comprehensive or basic but suffice to say there is a substantial difference.

  8. Another issue that seems to be getting lost in the debate is the benefits that illegal immigrants would receive under the proposed plan(s).

    Do you know what the insurance industry’s position on coverage for illegal aliens? I don’t, but it would be interesting to learn how that specific part of the issue impacts insurers and producers.

    • It’s my understanding that every bill being considered (the House, the Senate and now the Administration’s) changes the way illegal immigrants receive care in this country. They’re all pretty careful to maintain the status quo in that regard.

  9. Thanks for your expert opinion, it is refreshing to hear from someone who gives their honest opinion, and honestly, I do not know what side you fall on on this issue. I realize that most people do not educate themselves on these issues and can be easily duped; having this information easily available is crucial, so that those who do want to find it, can.

  10. You don’t say what the definition of “small group” was in the referenced study, but assume it is the under 50 market. If this is the market that lacks competition in some states, and the public option is the proposed solution to this inefficiency, why do the bills in Congress exempt small employers? Wouldn’t it make more sense to confine the public plan to the individual and small group markets and exempt the competitive large and muti-site markets? This feels like one of those “baby and bath water” issues.

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