Home > Medical/Health Commentary > Antitrust exemptions, the PPACA, and the future of health insurance competition

Antitrust exemptions, the PPACA, and the future of health insurance competition

The New York Times Prescriptions blog has moved largely to a Q-and-A format as of late, answering reader questions about specific ways in which the PPACA may or may not affect their lives.  For instance:  “will the law increase coverage of mental health services?” (in the individual market, yes); “will reforms help young, healthy adults without insurance?” (they say “yes,” I say they’re not looking at the whole picture); “is health coverage for domestic partners still taxed?” (yes); and today, “are insurance companies still exempt from antitrust laws?” (sorta kinda they never really were to begin with).

Implicitly assumed in both the question and the fact that the Times chose to address it is the idea that it’s a question of any consequence.  The issue of health insurance competition is one that repealing a federal anti-trust exemption wouldn’t even come close to fixing.  In fact, with the passage of the PPACA, this issue is likely to become more and more inconsequential over the next decade.

Before we get to that, let’s take a look at two ways in which anti-trust regulation might affect insurer competitiveness.  The first is briefly discussed by the Times:

As to whether more competition among insurers would result in lower rates, some experts suggest that just the opposite might occur. Insurers with a commanding market presence can put more pressure on provider pricing, this thinking goes. (It’s also the argument for a public insurance option.) “The fewer insurers you have, the more power they have to drive down the cost of care,” said Mr. Hall.

The argument goes that regulation should bolster insurer market power to offset provider market power to get something resembling a good deal for consumers.  To the extent that providers have and abuse market power, I would buy this argument.  Specifically, I would buy it for large hospitals or hospital systems (think Partners in Boston), or for enormous medical groups (though it should be noted that lots of those are in turn affiliated with / owned by large hospitals or hospital systems).  In the case of physicians more generally (especially those in smaller private practices), I would say that insurers already have plenty of market power, and that further exercise of that market power may well be harmful.

The claim made in the Prescriptions blog post is that insurers can drive down the cost of care by flexing their muscle with providers.  In one sense, that’s true.  It reduces the cost of care to the insurer, and indirectly to the insured patient.  However, there are “real” costs that go into the supply of physicians’ services:  practice overhead and educational debt service are the two big ones.  If insurers force down prices to the point that those costs aren’t covered, basic economics tells us that there will be a reduction in physician supply.  Maybe not immediately, but definitely 10-20 years down the road when all those would-have-been-medical students have been deterred from going down that path.

Even if insurer market power only leads to a reduction in economic rents to physicians (to the extent that I will concede that those rents exist) and not to below-cost pricing, it’s still not unequivocally good.  Many people right now would say that not enough people in the US have adequate access to physicians, or at least to certain kinds of physicians depending on where in the US they are.  Reducing rents may keep costs down in the short-term at the expense of access-expanding and cost-reducing competition in the future.

That’s the market power debate.  The second effect of anti-trust regulation on insurer competitiveness is a smaller, more technical one.  Ordinarily, anti-trust laws would forbid competing companies from sharing data that they use to set prices.  In the case of health insurance, this data includes individuals’ claims experience and medical costs while insured.  Pre-empting state anti-trust regulation of insurers could end the current practice of this data being shared among insurers as consumers switch between different insurance companies.  This would mostly impair the ability of new entrants to the individual and small group markets to price their products appropriately, in effect raising an anti-competitive barrier to entry to these insurance markets.  Not quite what we hoped for, is it?

So how does the PPACA affect insurance competition if it doesn’t touch the issue of anti-trust regulation?

Let’s first look at how firms can compete.  A competing firm can offer the same product at a lower price (or a slightly inferior product at a lower price), by accepting a lower profit margin or by trimming its underlying costs.  A competing firm can offer a higher-quality version of the product in question at an identical or higher (or even lower, I suppose) price.  Or, a competing firm can offer a product that isn’t straightforwardly superior or inferior to the competition, but qualitatively different in ways designed to appeal to certain segments of the market.

What health reform does (for the most part) is limit insurers’ freedom in setting prices, limit their ability to offer anything less than an incredibly comprehensive minimum benefits package, limit their ability to spend more money on customer service, fraud detection, or other non-medical expenses that might still affect product quality (minimum MLR requirements), and generally forecloses on the possibility of other insurance innovations being used to reduce price or improve quality.

As the Covert Rationing Blog pointed out long before I caught on (and as Hit & Run pointed out more recently), this reform basically turns health insurers into public utilities… not exactly the enterprises we think of when we imagine competitive markets.

Those looking to anti-trust regulation as a way to increase health insurance competition have missed the boat.  The bigger obstacle is now the PPACA.  Whether it will restrict competition in ways that are beneficial remains to be seen as the decade unfolds.  Come what may, colour me skeptical.

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  1. April 28, 2010 at 15:06

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