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Could competition make Obamacare more expensive?

December 4, 2012 Leave a comment Go to comments

Could competition make Obamacare more expensive?.

The Affordable Care Act makes a bet on competition. It wagers that pitting private insurance plans against each other will be a good thing: When health plans compete against each other on the exchanges, it will “drive down premium prices for Americans,” according to one HealthCare.gov factsheet.

That’s the hope, at least. But new analysis from three health-care economists suggests that the exact opposite could happen: Increasing competition among health insurers might actually lead to higher premiums.

Here’s how it would happen. Right now, insurers negotiate rates with health-care providers, creating a big, long list of how much they’ll pay each doctor or hospital for each procedure. The health plans that have lots of members tend to be able to negotiate better prices; they can guarantee a higher volume of patients.

Dana P. Goldman, Michael Chernew and Anupam Jan saw some evidence of this when they looked back at premium increases over the past decade. They saw that states that had really concentrated insurance markets — those where two insurers covered the lion’s share of patients — tended to see health insurance premiums rise more slowly than those with more competitive markets.

On the New York Times’ Economix blog, they contrast the very concentrated Hawaii market with the very competitive Virginia one:

Hawaii is a good example. Kaiser Permanente and Blue Cross Blue Shield together controlled more than 90 percent of the insurance market in 2001. In this highly concentrated market, the average premium rose only 72 percent over the decade, compared to an overall increase of 135 percent nationwide. By contrast, Virginia had one of the most competitive markets in 2001, with its two largest insurers controlling only 25 percent of the market, yet premiums in the state increased nearly 140 percent over the period.

Other research on competition in health insurance markets suggests that it hasn’t restrained health-care costs in a way that some have hoped. The federal employee health benefit plan, where private insurers compete for 8 million federal workers’ business, has seen its costs rise faster than government-run Medicare.

Here’s a chart that Julie Appleby and Marilyn Werber Serafini put together for their recent story in the Atlanticcomparing yearly growth in the two programs.

One factor here could be that insurers don’t seem to be great at negotiating lower prices.One study in the journal Health Affairs found that “Even in markets with dominant health plans, insurers generally have not been aggressive in constraining rate increases, perhaps because the insurers can simply pass along the costs to employers and their workers.”

Goldman, Chernew and Jan caution that, much as we ask banks if they’re too big to fail, it might be worth asking whether “insurers are too small to succeed” in the new health exchange landscape.


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