This post is co-authored with
Rein Halbersma and Katalin Katona, who are economic
policy advisors at the Netherlands Healthcare Authority and affiliated with Tilburg
University, the Netherlands.
A recent Economix blog article in the New York Times (“Health Insurance Exchanges MayBe Too Small to Succeed”), raises the concern that encouraging competition in health
insurance exchanges could lead to health insurers that are too small to
succeed. It is clear that the bargaining leverage of insurers, which is determined
by their size and the presence of alternative insurers, lowers provider prices,
and that high provider prices are a serious problem. However, there are several
important arguments against letting health insurance markets gravitate towards
higher levels of concentration.
First, allowing insurer market power only makes a bad problem worse. Insurer market power often has the political
repercussion of leading to a cry for even more “countervailing power” by
lobbying health care providers. The end result of such a process can be the
worst possible outcome for consumers: market power for both providers and
insurers. This process occurred in the U.S. during the 1990s in what was called
the “Managed Care Backlash”, and the phenomenon has also occurred in other
countries with private health insurers, such as the Netherlands.
Second, if providers have too much market power, that problem is best dealt
with directly. Encouraging insurer market power is not an efficient policy for
dealing with antitrust issues in provider markets. Provider market power is
best dealt with through vigorous antitrust enforcement. The Federal Trade Commission
and the Antitrust Division of the Department
of Justice have renewed their
efforts in this area in recent years.
Third, allowing insurer concentration can lead to too much insurer
market power and substantially higher premiums. The economic reasoning is that
insurer market power limits the incentives to pass on to consumers the
discounts they obtain via their buyer power. In extreme cases of insurer
monopoly power, the generated savings on provider prices can be more than
offset by dramatically higher premiums.
Fourth, the consequences of too much insurer market power are worse than
the consequences of too little. Once insurers have obtained market power, the
situation is typically irreversible. Small insurers may always decide to merge
–subject to antitrust control-, but “unscrambling the eggs” is impossible in practice.
As the New York Times article rightly points out, one may worry whether some health insurers
are too small to succeed against powerful providers. And excessively high
prices set by powerful health care providers are a serious problem for health
policy. However, when it comes to passing on provider discounts to consumers, we
should also ask whether allowing insurer market power simply makes them too big
to care.