Is Health Insurance Marketplace Competition Really Necessary?

Health Insurance Marketplace Competition

I don’t understand what the big deal is about the fact that some Americans who buy their health insurance on the Health Insurance Marketplace (i.e., the Exchange) have only ONE insurance company selling plans? Under Obamacare, the one insurance company still sells MANY plans that these non-group Americans can choose from —Platinum and Gold plans that sport higher premiums (and lower cost-share) and Silver and Bronze plans with lower premiums (and higher cost-share). Does the lack of Health Insurance Marketplace competition doom the Americans who live in one insurance company areas to higher health insurance costs? How many insurance companies do you need before Health Insurance Marketplace competition starts to give consumers reduced prices? If it turns out that Insurance Marketplace competition does NOT reduce health insurance premiums and cost-share, then it is not worth a hill of beans to the Americans buying.

The downward trend in Health Insurance Marketplace competition over the past couple of years has been getting a lot of media attention. When the largest (and most profitable) health insurance companies started to exit the Health Insurance Marketplace in certain areas around the country, the news media sounded the alarm that many Americans would be without CHOICE. Americans are being continuously indoctrinated to believe that

Choice = Competition = Lower prices and Better Benefits (???)

If this equation is true, then there would be a strong connection between Health Insurance Marketplace competition and affordability. Let’s take a look.

Health Insurance Marketplace Competition –The Reality

Looking at the data supplied by the Kaiser Family Foundation, we can see that many counties across the United States have no Health Insurance Marketplace competition (i.e., only one insurance company sells plans in the counties). One state that has a lot of Health Insurance Marketplace competition is New York, where the vast majority of its residents can choose from 3+ insurance companies (presumably considered an indication of high Health Insurance Marketplace competition). Some areas in New York have as many as eight insurers (called carriers) vying for business in 2017 (e.g., Westchester County where the median household income was $83,958  in 2015).  Comparing the 2017 premium prices of the second lowest cost silver plan for a non-smoking 40 year old male, the data shows that at $456 per month, this represents one of the HIGHER costs across the country!  New York is the poster child for Health Insurance Marketplace competition and yet they have higher monthly premium costs than all states except Alabama, Alaska, Arizona, North Carolina, Oklahoma, Vermont, and Wyoming. Even high cost-of-living Hawaii’s is lower ($347).

In Utah, a state with substantially less Health Insurance Marketplace competition, the second lowest cost silver plan for the non-smoking 40 year old male is $292 per month. Obviously, there is more to the story than simply connecting Health Insurance Marketplace competition to health insurance premium costs. Reality is much more complex.

If Not Health Insurance Marketplace Competition, What Then?

Health Insurance Marketplace competition actually does not play a large role in setting health insurance premiums simply because other factors built into the peculiar nature of the United States healthcare system are in control. The health insurance premium prices are directly determined by

  1. the prices that local healthcare businesses charge for their services
  2. the relative negotiating power of the health insurance company and the various healthcare businesses with whom it contracts.

For Americans with private health insurance, the prices we pay for healthcare services are set through negotiation between our health insurance company and the individual healthcare businesses with which it contracts to form its “network”. When an insurance company brings a large number of potential customers (called the risk pool size) to the negotiating table and has many healthcare businesses from which to choose, then the insurance company can demand lower prices. When the reverse is true, the healthcare business supplying a given service (like cardiology, anesthesiology, chiropractic, hospital, etc.) can demand higher prices.

The healthcare businesses in New York probably enjoy higher negotiating power than they do in Utah. Higher negotiated prices for healthcare services equals higher health insurance premiums. One could even argue that the increased Health Insurance Marketplace competition in New York decreases the insurance company’s relative negotiating power (fewer customers per company) and therefore serves to INCREASE health insurance premiums rather than reduce them . This is especially true in local areas where consolidation of healthcare businesses has been used to leverage negotiating power (for example, four cardiologists get together to form one business unit, or even create a business entity that includes a hospital).

The price of health insurance premiums is also affected by such factors as (1) the amount added for health insurance company cost plus profit, (2) the local wealth of the population and its willingness to pay higher healthcare prices (everything costs more where rich people live), (3) the health of the local population,(4)  local cost-of-living, and (5) the scarcity of doctors and their ability to command higher salaries.

How Many Insurance Companies are Enough?

The question to ask at this point in our discussion is not “how can we increase competition in areas of the country with only one health insurance company?”, but rather “why do some areas have one and others eight insurance companies?”  An insurance company does not enter local markets because they are there to help their customers get the lowest premiums possible.  As for-profit companies,  they function to make the most money (and profit) they can. If the business conditions are not conducive for profitable business growth, then the company will not enter a market. It doesn’t matter if there is only one current insurance company in the local market or eight.

Health Insurance Marketplace competitionIf the population density is low or the potential customers relatively poor, then the local area probably cannot be squeezed to provide sufficient profit for two health insurance companies to operate. Areas with a scarcity of doctors is also not business friendly.  If an insurance company wants to enter any market where others already operate, then it must spend a lot of money signing up doctors and customers while also taking customers away from the established companies. They would only want to do this if profits were guaranteed.  In fact,our government uses taxpayer money to this end often.

Given my analysis above, there doesn’t seem to be a need to artificially increase Health Insurance Marketplace competition with the hope that premium prices will come down. In fact, this strategy goes counter to natural business conditions and doesn’t work. There are many other more cost-effective ways to bring down health insurance premiums without creating an artificial market.  Unfortunately for individual Americans, concentrating on Health Insurance Marketplace competition to increase healthcare affordability diverts us from the important cost-cutting measures that will bring down health insurance premiums.

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