Is Health Insurer Competition Good?

A blog about business and economics.
May 31 2013 9:45 AM

How Much Health Insurer Competition Do We Want?

Sarah Kliff examines the question of how much competition there will be between insurers in Affordable Care Act exchanges (spoiler: It depends), but I think a really interesting question in this neighborhood is how much competition between insurers do we want.

As any good liberal could tell you, single-payer health care systems tend to have much lower costs than the fragmented U.S. system. And that's no accident. In a single-payer system, you have a monopoly on health insurance, which means you have a monopsony purchaser of health care services, which sharply drives down the amount of money that needs to be forked over to providers. Now typically when people talk about single-payer, they have in mind a government-owned monopoly rather than a private one. A private health insurance monopoly would be able to squeeze provider rates down (just like a government-run single payer), but instead of the returns manifesting as taxpayer savings, they would manifest as windfall profits for shareholders.

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So you wouldn't want a private monopoly.

But it's not clear that you would want tons of competition either. With a lot of insurers in the field, what essentially happens is that market power shifts to the hospitals and other providers. Insurers need to "compete" to gain access to key providers, so providers can charge high prices that insurers then largely pass along to customers as high premiums. It seems to me that the optimal situation is to have a few insurers in the exchange so that competition plus Medical Loss Ratio regulations keep premiums reasonable, while ensuring that the insurers retain market power vis-à-vis providers and thus can act as bulk purchasing agents on behalf of patients. But how many is "a few"? Three? Four? I don't know. But as states set exchanges up, this is something to think about.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.