Insurance markets and competition

A couple of weeks ago I authored a post here explaining why increased competition in insurance markets is unlikely to bring down premiums.  Now here’s Austin Frakt and Ian Crosby (authors of The Incidental Economist blog) making similar points in a column for Kaiser Health News.

While there is some evidence that insurers’ market concentration plays a role in premium increases, that role is small. For example, a National Bureau of Economic Research paper found that only 2.1 percent of employer-sponsored health insurance premium increases between 1998 and 2006 were due to insurer concentration.

It is far more plausible that a high proportion of premium increases are due to a combination of concentration in the provider market and adverse selection, especially in the nongroup market. After all, most premium dollars are not kept by insurers and go toward payment of health care services. Insurers take a little off the top, but not enough to be blamed for anything like the perennially large rate increases.

A recent Health Affairs paper describes the upward pressure on costs driven by provider organization and concentration. Based on hundreds of interviews with representatives of hospitals, physician organizations, health plans and other stakeholders in six California health care markets, the authors conclude that “[t]he shift in who holds the upper hand in negotiating payments—once held by health insurance plans but now resting with health care providers—has had a major impact on California premium trends.” And we all know what those trends have looked like lately.

Perhaps counter-intuitively, large insurers can be bulwarks against high costs driven by provider consolidation. Two papers by health economists in the International Journal of Health Care Finance and Economics indicate that the high degree of market power held by insurers acts as a counterweight to that held by hospitals. Therefore, diluting the insurance market may have small downward effects on insurer profit and administrative costs, but it could have large upward effects on prices of health care services. Those higher prices would be passed on to consumers.

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