Competition in the healthcare industry
John Hood, writing at The Corner, grumbles about the shuttering of Principal Financial’s health insurance division. This is understandable since Principal Financial provides Mr. Hood with his own insurance.
Here’s the New York Times:
At the Principal Financial Group, the company’s decision reflected its assessment of its ability to compete in the environment created by the new law. “Now scale really matters,” said Daniel J. Houston, a senior executive at Principal, which is headquartered in Des Moines. “We don’t have a significant concentration in any one market.”
And here’s Hood:
United HealthCare is reportedly going to offer health plans to former Principal subscribers, including me, but we have no idea what those plans will look like. As competition shrinks, they’ll certainly be more expensive and less flexible. At JLF, we had carefully designed two consumer-driven options — one based around health savings accounts and the other around health reimbursement accounts — and experienced excellent results, including several years of nearly level premiums. Now, we’ll just have to see what administration ideologues and federal bureaucrats will permit us to purchase. [emphasis added, EDK]
Mr. Houston from the Times piece is correct: scale really matters. Having a very large risk pools is important if you want to contain health care costs. Having a multitude of small, regional monopolies with relatively small risk pools is not a good way to approach health insurance. But it’s the way we’ve been doing it for years. It’s also, contra Hood, not terribly competitive. If anything, the closure of more small insurers, and the consolidation of big insurers could lead to more competition rather than less, and lower costs for consumers rather than higher costs.
This is one reason I really wanted to do away with the monopoly protections the government grants health insurers, and wanted both the exchanges to be national and to permit health insurance to be sold across state lines. Scale matters. One reason single-payer can be so effective at cost controls is that the government has massive scale, a huge risk pool, and can really strong-arm the supply-side. Really big insurers with national markets and national risk pools would have similar bargaining power but would also have the added pressure of competing with other really big insurers.
The question is whether we will see this sort of good consolidation, increased scale, and increased competition under the new law or whether we will see consolidation lead to more monopolization. Making the exchanges national and allowing insurers to compete across state lines would go a long ways toward ensuring the first scenario. As it stands, of course, Mr. Hood is leaving out the part about the status quo. Whatever complaints he may have about lack of competition under the new law could just as easily be applied to the way things are now.