O’Neill Institute for National and Global Health Law O’Neill Institute for National and Global Health Law Legal Issues in Health Reform

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Do We Need More Competition Among Insurers?

All the talk about repealing insurers’ antitrust exemption and creating a public plan to compete with them raises the question: what will more competition among health insurers really accomplish? Recall that competition among hospitals often increases rather than reduces prices. Can insurer competition work better that that, or than it does now?

One key is to focus separately on the two major components of insurance rates: 1) medical costs, which are driven by provider pricing; and 2) insurers’ overhead costs, which include profits and administration. Starting first with 2): at the moment, the health insurance industry is not terribly profitable — with something like a 2% margin last year, and historically well less than 10%. There certainly are efficiencies to be gained by reducing administrative overhead, including sales costs, but it’s not at all clear this would be achieved by having more insurers in the market.

As for medical costs, more insurers might actually be bad for prices. Hospitals and physician specialty groups wield considerable market power in many local markets – which can be met effectively only by large purchasing power by insurers. This very fact is why a public option is key, since government has the muscle to force providers’ prices substantially lower than rates negotiated by most private insurers.

Adding more private insurers to the market would only decrease their leverage over provider pricing. However, if insurers were conspiring, or weren’t sufficiently motivated by competition, perhaps they might be not be using the full extent of the market power they have. To counter this concern, realize that large employers put considerable market pressure on insurers to lower both provider prices and overhead margins. If margins are too high (or medical “loss ratios” too low), large insurers have more reason to self-insure.

And, in selecting a company to administer self-insured benefits, large employers shop mainly based on how deep the discounts are that insurers have negotiated from providers. Typically, insurers also pass these same discounts on to their insured subscribers, including small groups and individuals. Thus, for medical costs, a market driven by large group purchasers can function well, and perhaps best, without lots of different insurers.

This still leaves the issue of overhead margins for individuals and small groups. Here, there is benefit to more competition, or to different purchasing vehicles such as the exchanges that pending legislation would create. Another approach would be simply to regulate medical loss ratios, as some states currently do. Then, the purchasing power of larger insurers would not threaten the consumer interests of smaller subscriber units.