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.