Does more competition in health insurance actually bring down costs?

David Sanger

David Sanger speaks at the Paramount Theatre in Rutland Tuesday.

While speaking at Rutland’s Paramount Theatre last night, the New York Times’ Washington bureau chief David Sanger raised an interesting question about our assumptions on health insurance and competition.

He referred to a study that was written up in the Times’ Economix blog, which compared the concentration of competition, measured by how much of a state’s insurance market is concentrated in the largest two insurers, to the rise in the cost of health insurance premiums in the same state over the ten years between 2000 and 2010.

The study finds that there is not a meaningful correlation between more competition and lower costs. In fact, Sanger pointed out, the reverse actually seems to be true – and this raises concerns about the direction we’re taking with Obamacare.

The concern comes from the increased competition required from health insurance exchanges – which states are required to have set up by 2014, or the federal government will set up for them.

Apparently, the more concentrated the insurance market, the more leverage the biggest insurers have to bring down costs. The more fragmented the market, the less leverage each individual insurer has. As Economix puts it:

In imperfect health care markets, competition can be counterproductive. The larger an insurer’s share of the market, the more aggressively it can negotiate prices with providers, hospitals and drug manufacturers. Smaller hospitals and provider groups, known as “price takers” by economists, either accept the big insurer’s reimbursement rates or forgo the opportunity to offer competing services. The monopsony power of a single or a few large insurers can thus lead to lower prices. For example, Glenn Melnick and Vivian Wu have shown that hospital prices in markets with the most powerful insurers are 12 percent lower than in more competitive insurance markets.

Food for thought as we steadily advance on the way to a single-payer system. For the full Economix blog post on this, please click here.