Friday, January 18, 2013

Health Insurers Should Not Become Too Big to Care

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.

Health Care Competition Saves Lives

Evidence has been mounting on the impacts of health care competition on the quality of care. The vast majority of these studies look at hospital competition and use mortality risk as a measure of the quality of care. Two recent studies I've done with colleagues analyze the impact of reforms in the English NHS designed to promote competition among hospitals.

In one study, Rodrigo Moreno-Serra, Carol Propper and I examine the impact of these reforms on mortality for heart attack patients and overall mortality. We find that mortality declined substantially more after the reforms for hospitals facing more potential competition than for those that did not. Specifically, we estimate that the reforms led to a 0.3% drop in the mortality rate for heart attack victims, saving nearly 1,000 lives per year. A recent article in Vox (an online economic policy journal) summarizes the results.

In a followup study, Carol Propper, Stephan Seiler and I analyze the impact of the NHS reforms on patient choice of hospitals for heart bypass surgery (CABG). This is summarized in a recent Vox article. We find that NHS patients are much more responsive to quality differences across hospitals (measured as risk-adjusted mortality rates) after the reforms. As a consequence, hospitals are driven to be responsive to patients and compete on the basis of the quality of care. We find that the reform reduced mortality for bypass surgery patients by 3%, via patients choosing better quality hospitals.

While there is still a lot of work to do to better understand the nature of competition in health care markets and impacts on quality, these two studies do add to a growing body of evidence on the topic. The weight of the evidence, in my opinion, is showing that health care competition saves lives. For more general overviews on the evidence, see a recent synthesis piece on hospital consolidation that Robert Town and I wrote for the Robert Wood Johnson Foundation, an earlier synthesis piece by Town and William B. Vogt, a chapter that Town and I wrote for the Handbook of Health Economics , and a recent survey piece on hospital competition under fixed prices by Hugh Gravelle, Rita Santos, Luigi Siciliani, and Rosalind Goudie.