In These Health Care Markets, Antitrust Action is Almost Inevitable

I’m in the time machine again this morning as I read this article by David Hilzenrath in The Washington Post about the federal government’s new antitrust suit against Blue Cross Blue Shield of Michigan, that state’s largest health insurer. Here are two key excerpts from the article, which illustrate the issues:

In some cases, Blue Cross’s contracts required hospitals to charge other insurers significantly more than they charged Blue Cross, the federal antitrust suit said. In other cases, Blue Cross agreed to increase the prices it pays hospitals – boosting costs for its own customers – in return for commitments that other insurers would be charged no less, the lawsuit said.

[…]

The nonprofit Blue Cross plan in Michigan covers more than nine times as many Michigan residents as its next-largest commercial competitor and more than 60 percent of the state’s commercially insured population, the government said.

It is the second of these excerpts that allows BCBS to impose the unusual contracts on the hospitals. If BCBS were some tiny outfit, then it would not be able to dictate the terms of these contracts to the providers. Any hospital that didn’t want to abide by the terms could opt out without suffering a loss of access to such a large customer base.

The interesting question for me is less how these markets came to be dominated by one insurer and more why this dominance can continue. The article is exposing these anti-competitive tactics. But even without them, the nature of insurance itself leads to economies of scale. Here’s how I explained it about a year ago:

This is not some obscure detail — the risk-adjustment mechanism is the key to getting a private market to function properly. In the current system, a potential competitor to existing insurance companies faces the risk that the small piece of the population it can compete away from established insurers will have characteristics that make them more expensive to cover. This is the classic problem of adverse selection. Given this risk, we have less competition among health insurers. Without competition, existing insurers get large market shares (which helps them to some extent on the adverse selection problem). Because they are big, they have more market power than we would like. They also don’t look to serve smaller groups or individuals to the extent we would like.

Mandatory participation in the risk-adjustment mechanism should be required for any health insurance plan. If the Health Insurance Exchange is the means by which that happens, then I’m all for it.

This article grew out of my frustrations with Republicans more so than Democrats. The “small businesses” they should be trying to grow are small insurers, offering innovative products and lower prices to potential customers to chip away at the market power of dominant insurers. Such potential entrants need the protection of the risk-adjustment mechanism (and antitrust enforcement) if they are to compete.

Disclaimer: This page contains affiliate links. If you choose to make a purchase after clicking a link, we may receive a commission at no additional cost to you. Thank you for your support!

About Andrew Samwick 89 Articles

Affiliation: Dartmouth College

Andrew Samwick is a professor of economics and Director of the Nelson A. Rockefeller Center at Dartmouth College in Hanover, New Hampshire.

He is most widely known for his work on the economics of retirement, and his scholarly work has covered a range of topics, including pensions, saving, taxation, portfolio choice, and executive compensation.

In July 2003, Samwick joined the staff of the President's Council of Economic Advisers, serving for a year as its chief economist and helping to direct the work of about 20 economists in support of the three Presidential appointees on the Council.

Visit: Andrew Samwick's Page

Be the first to comment

Leave a Reply

Your email address will not be published.


*

This site uses Akismet to reduce spam. Learn how your comment data is processed.