Who’s Afraid of Competition?

For opponents of President Obama’s health care reform efforts, there’s no greater rallying cry than “Competition!” Invariably, government is presumed to be competition’s sworn enemy. Senator Tom Coburn, M.D. (R, OK) provides a nice summary of this point of view:

“We are either going to have a government-run health care system or we are going to have a private, vigorous, healthy, consumer-oriented system where we actually allow market forces to allocate these scarce resources.”

Unfortunately for Sen. Coburn’s line of reasoning—as Monica Sanchez recently noted here and here—when it comes to health insurance, “vigorous, healthy” competitive markets are a pipedream. They do not exist anywhere in the country, and it is highly unlikely that they could. Instead, in nearly every local market in the country a very small number of insurers exercise what economists call “oligopoly” power (the ability to charge prices higher than their costs, because of the absence of robust competition). And as long as private firms remain the dominant insurers (and weakly regulated ones at that), it’s very hard to imagine how more competitive health insurance markets could come into existence.

Strong government action—the antithesis of “vigorous, healthy, consumer-oriented” markets, in Sen. Coburn’s worldview—is desperately needed to bring some competition over price and quality into the health insurance industry.

The government action required includes the kinds of efficiency-enhancing measures President Obama kick-started through the stimulus package—investments in better information-technology systems in health care, in preventive care, and in studying whether “comparative effectiveness” measures can improve quality and control costs. His Office of Management and Budget director Peter Orszag is a leading authority on these tools for “bending the curve” of health care cost growth, and there may be bipartisan support for extending some of these measures further as part of a comprehensive health care reform package.

The government action required also includes more aggressive regulation of private health insurers, especially by prohibiting them from competing through exclusion of the most sick or likely-to-become-sick from coverage. (Seems like a no-brainer, huh?) There may even be some Republican support available for such regulatory strengthening, at this time of rapid shifts in public sentiments about government. “Regulation” was a dirty word in American politics for three decades, reliably drawing a groan of dismay. (“There they go again—those bungling, greedy bureaucrats messing with The Market.”) But when President Obama, in his speech before Congress last week, mentioned regulating the financial industry, there was a standing ovation before he could even finish his sentence. And it was a bipartisan cheer—I couldn’t spot a single legislator, of either party, still in their seat.

As important as these kinds of reforms are, there is a third and absolutely critical form of government action required, if we want to provide quality coverage to everyone and rein in the runaway cost inflation in health care: creation of a new public insurance plan that is open to everyone, to operate alongside private insurance plans. This is what President Obama proposed on the campaign trail, but it has not appeared in his speeches this week on health care reform; apparently, he wants to leave this policy design question open for legislators to weigh in on.

Unsurprisingly, a group of Republican senators threw down the gauntlet this week, saying that they’re willing to talk about all the other components of health care reform but not this one last, critical piece. A public insurance plan would mean Big Government messing with the superior wisdom of markets once again, they said—“another Washington bureaucracy” stepping on our freedoms. But there was a curious twist to their argument, this time around: instead of suggesting that fumbling, wasteful government would make health care more costly and inefficient, their concern was that private insurers would be forced out of business through competition from the public plan. That’s right: the competition introduced by creation of a public plan is what they’re so scared of.

While the Republican senators contend that a public plan would drive private insurers out of business, careful analyses (such as this, this and this) of the kind of “hybrid” health-insurance system (with public and private plans operating side-by-side) proposed by President Obama predict a mix of public and private plans operating long into the future. What they also predict, though—and this may give us a better understanding of the Republican senators’ gauntlet-tossing—is that the public plan will force private insurers to slow down the rate of price inflation. In other words, they will actually have to compete for customers based on price and quality (that is to say, the mechanism through which markets work), thanks to the public plan. And there’s no reason to think they can’t do so, if this competitive pressure is introduced into the system.

At the same time, there’s no good reason to expect them to ever rein in health care price inflation as long as we fail to introduce more competitive pressure through creation of a public plan. Oligopolistic insurers and oligopolistic health care providers (the small number of consolidated hospital and clinic groups that dominate most local health care markets, as will be described in my next blog post) can pass on price increases to health care consumers (that is, all of us). In some instances, they do this through explicit anti-competitive price-raising agreements, but simple economic reasoning should lead us to expect that in a great many more cases a similar effect (prices raised, to the mutual benefit of insurers and providers, at the expense of the rest of us) is achieved with no need for direct collusion. This anti-competitive dynamic appears to be exactly what has happened in Massachusetts, where health care reform required everyone to get coverage from private insurers without creating a public plan or introducing any other means of “bending the curve” of price growth.

What’s needed, in short, to provide quality coverage for everyone and at the same time stop prices from breaking both our private and public budgets, is countervailing bargaining power for health care consumers. This bargaining power would balance out the price-setting power of oligopolistic insurers and oligopolistic providers, introducing more competition on price and quality into health insurance markets. A public plan open to everyone would provide that countervailing bargaining power, because of the large number of people covered (on whose behalf the government would have an incentive to bargain for better rates from providers) and the administrative efficiencies of public insurance programs compared to private ones.

Most importantly—for making sense of the political fight now fully joined on whether to include a public plan in health care reform—a public plan would generate, not impede, competition in health insurance markets. And that, in fact, is why the self-proclaimed defenders of the “Free Market”—who just happen to have some longtime friends in the health insurance and pharmaceuticals industries—fear and oppose it.

— Phillip Cryan is a graduate student in the Goldman School of Public Policy, at the University of California, Berkeley. For his Masters thesis, he is analyzing the impact of an employer play-or-pay mandate for health care on employment.

03-06-09 By Phillip Cryan | Comment (2)


Arguing for or against competition in health insurance misses the point. Coburn’s claim that it would hold prices down is bunk even if we didn’t have oligopolistic pricing. Why? Because insurance companies compete with each other not by reducing prices but by trying to enroll the least risk-prone customers, and discouraging the business of those who are likely to cost them more.

Even if they were to abandon their current practice of refusing to insure people with pre-existing conditions, they could still jack up their premiums for “high risk” patients, charge huge deductibles and co-payments, refuse to cover expensive but necessary procedures, endlessly stall on paying even “legitimate” claims.

We’re paying through the nose for their “risk aversion” strategies—which account for most of huge administrative costs of our current system (most of which is pure waste).

With insurance, you keep costs down by making the risk pool as large as possible. That’s why group insurance costs less than individual insurance. That’s the logic of single payer—when everybody’s covered by the same program, the overall costs per person are far less, and everybody gets the same access to care. A public option may have lower administrative costs than a private plan, but it’s also likely to become a dumping ground for everybody the private plans don’t want to insure. Worse, it fails to address the larger costs of having the insurance pool divided up into 57 varieties of coverage.

What’s interesting to me is that AHIP seems as hell-bent on avoiding a public option as it is single payer.

Posted by Peter Shapiro in Portland, OR | 03/10/09, 01:29 PM EDT

The biggest crime in our healthcare system is that the customer (the patient) has no idea how much his care cost. Most people can tell approx. how much a new car will cost, but nobody can tell you how much a healthcare procedure will cost them.  It’s all a mystery hidden by smoke and mirrors put up by the insurance industry. There’s the bill the patent see from the doctor or hospital, and then there’s the insurance reimbursement which is a fraction of the bill. I’ve always wondered how my doctor can stay in business receiving only 65% of his charges. Any other business couldn’t last 6 months. I had a hospital bill of about $220,000.00 (1/4 mil.) for 2 angioplasty (stent) and 2 night stay. The insurance, with my co-pay, paid $31,000.00 of the bill. And the hospital seemed to be happy with it and they are still open for business.

There is a 2 tier pricing system, one to justify why you need to have health insurance and pay high premiums. Also, if you don’t, you can be forced in to financial ruin. The 2nd pricing tier is the health industries hidden actual procedure cost. This is the one the insurance industry claims as a discounted or “wholesale” price only its members get. But in reality, it is the real actual cost for health services. Health providers almost exclusively get their income from insurance and Medicare reimbursements. They make a profit from these reimbursements, even though they are only a fraction of what they bill.

The following are facts about our healthcare system:

1)Insurance companies needs hospitals and doctors and are not trying to put them out of business by under paying them. Doctors can survive without insurance companies, but insurance companies cannot survive without doctors.
2)Doctors and hospitals are forced by insurance companies, through their contracts, to bill their patients at an inflated rate. The inflated rates they had to use in negotiating a fair compensation from the insurance company. If they don’t charge these high rates, the insurance company can renegotiate at a low reimbursement.
3)Hospital use 2 accounting system to track inventory and cost. One to figure yearend bonuses and the final reimbursement to agree on from insurance companies. The other one, for insurance negotiations. The 2nd method is called the “ChargeMaster”, no other industry uses this method because it is unrealistic and generally overinflated by 400% to 800% of actual cost.
4)The patient is charged from the “ChargeMaster”. The insurance company gets to pay the real cost. The insured patient thinks he’s get a great discount. The uninsured goes into bankruptcy.
5)The health industry is the only industry that does not have to post their charges, does not have to give estimates for procedures, and does not get investigates for overcharging.
6)Our perception of the cost for healthcare in America is based more on the amount of the bills we receive from doctors and hospitals, and the high insurance premiums. In reality, the true cost is what insurance and Medicare really pays, minus the cost for health insurance.
7)If Americans were billed by their healthcare providers the true cost for services, annually it would cost them less than their yearly insurance premiums, plus the deductible.  Only a catastrophic event health insurance would be needed, which could be provided by a government run private insurance pool.

The American public is treated like children when it comes to healthcare. Our eyes are diverted from what really is happening to us. It’s a house of smoke and mirrors run by the insurance industry. Americans have bought in to this idea that they have to have health insurance to get a discounted price for health services. We are paying insurance premiums for the privilege to be billed the actual cost for our healthcare. If that is not a crime, I don’t know what is!

p.s. I pay $9,200.00 a year to an insurance company for the privilege to pay the true cost for health service.

Posted by Tom in CA | 03/12/09, 03:14 PM EDT
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