Friday, April 9, 2010

Interstate Insurance competition.....

Another fancy reform gadget that is thrown around by both parties is the concept of “increased competition”, as if Adam Smith’s magical hand will wave over the marketplace and prices/premiums will magically lower. It is not true for a number of reasons, but a real discussion of free market economics in healthcare can wait for another day. Today, we will discuss insurance competition. There is much to discuss, although interstate competition has not been allowed, there is often substantial instate competition.

The health insurance market has been traditionally regulated in a federalist model with each state being responsible for various regulations, including coverage limits, financial solvency of both the individual, as well as the insurance company, and to help protect against fraudulent behavior, ensuring that members/enrollees are provided the benefits as promised. State regulations have also imposed rating, and rate banding legislature to prevent health insurers from charging too much for certain “high risk” patients (Kofman, Pollitz, 2006). Additionally, there is variance between states as pertains to a “guarantee of issue”, as many states have different qualifications, this could potentially destabilize the market by causing an asymmetry, as sicker patients would not likely qualify for out of state insurance, while healthier patients could opt for cheaper out of state plans. Kofman and Pollitz also describe how the detection, and prosecution of fraudulent activity would be quite difficult, and might even raise some state constitutionality issues when trying to enforce different state laws. This creates a murky situation at best, and potentially exposes many patients to fraud, and potential predatory pricing tactics, as well as many companies to unfavorable market conditions. As mentioned above, another potential problem that arise with sales of health insurance across state lines, is the risk of creating an adverse risk pooling. Health insurance, like any other insurance commodity, relies on pooling of risk, meaning that costs need to be spread across both sick and healthy people in order to maintain a stable economic foundation. By allowing the sale of insurance across state lines, out of state insurers will get to “cherry pick” individuals, and because there is no guarantee of issue for an out of state transaction, healthier individuals may be offered lower rates than they can obtain locally, while sicker individuals will be denied coverage. This will result in the in-state insurers covering an increasing percentage of sick individuals resulting in an adverse risk selection bias. This will undoubtedly cause prices to rise in-state, and overall health insurance premiums will increase as a result. This is especially important when we realize that only 5% of our population accounts for 49% of healthcare spending (Stanton M, 2006). By denying insurance companies that ability to pool risk, and to spread healthcare costs throughout a specific population, they will have no choice but to increase premiums for those who are sick, or have chronic medical conditions. When we examine the interstate sales of health insurance, it appears on the surface to be a good idea, however, real time examination of current markets may reveal otherwise. An important concept in financial exchanges is leverage, and companies and institutions will attempt to use whatever leverage is available to negotiate better financial terms. In healthcare, this frequently occurs between health insurers and healthcare providers/institutions. When one party gains leverage on the other it is used to either raise, or lower prices depending on the entity involved. When we look at certain markets, as BNET reported, for example Milwaukee, where there is no dominant insurance company, leverage is given to the healthcare providers and hospitals, and many physicians will not accept less than 200% of Medicare rates, in contrast to a nearby city like Chicago, where typical payments for private payers are only 112% of Medicare rates (Terry K, 2009). Which raises an interesting dilemna.

Providers in the example provided via BNET, are actually driving costs higher, due to decreased market share in the insurance industry. I got all excited, and actually though of doing this as a full on study, using the Herfindahl index and getting to play around with some fancy math, but the NBER beat me to it...unfortunately, they found that an increased concentration in the marketplace, could only account for an increase of 2% in premiums over an 8 year time span, with health insurance premiums rising an average of 10% or more per year over that same time period.


We examine whether and to what extent consolidation in the U.S. health insurance industry is leading to higher employer-sponsored insurance premiums. We make use of a proprietary, panel dataset of employer-sponsored healthplans enrolling over 10 million Americans annually between 1998 and 2006 to explore the relationship between premium growth and changes in market concentration. We exploit the differential impact of a large national merger of two insurance firms across local markets to estimate the causal effect of concentration on market-level premiums. We estimate real premiums increased by 2 percentage points (in a typical market) due to the rise in concentration during our study period. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis a vis physicians, whose absolute employment and relative earnings decline in its wake.

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