Corporate & Securities Law

How Competitive Is the Health Insurance Market, Really?

Not very, according to the President in his recent health care speech, making the case that lack of competition and for-profit monopolists are what ails the health care market:

“Consumers do better when there is choice and competition. Unfortunately, in 34 states, 75% of the insurance market is controlled by five or fewer companies. In Alabama, almost 90% is controlled by just one company. Without competition, the price of insurance goes up and the quality goes down…an additional step we can take to keep insurance companies honest is by making a not-for-profit public option available in the insurance exchange…”

I wondered where these figures came from when I heard the President rattle them off during the speech.  Indeed, a 75 percent share protected by regulation that immunizes firms from out of state competition might well be sufficient to allow monopoly pricing.  So, are these figures correct?

The short answer is no.  Economist John Lott re-runs the numbers correcting for an important error: the figures the President gave mistakenly leave out employers that self-insure and fund their own plans.  This is not a trivial omission as one source estimates that approximately 55 percent of employees are insured under such plans.  Lott corrects this error and recalculates shares for the top 15 most concentrated states (uncorrected):

As you can see from the Table (click on it), the corrected shares are significantly lower. Lott also points out that the largest insurer in most states is already a non-profit enterprise.   If competition, monopoly power, and barriers to entry are going to be an important part of the health care discussion, as with any discussion in involving industrial organization economics, it is important to get the details right in order to generate accurate predictions and policy prescriptions.

Full post as published by Truth on the Market on September 19, 2009 (boomark / email).