Obama, Ryan, and the Myth of Competition

Both the exchanges at the heart of ObamaCare, and the competing plans in the Ryan Medicare reform proposal rely on competition among health insurance plans to reduce the upward trend in the costs of health care. But health insurance isn’t health care.

With the consolidation of health care providers that is happening throughout the US, more and more health care is being purchased in non-competitive markets. Health insurers are faced with large systems that must be included in the carriers’ networks if they, the insurers, are to offer a competitive product in the market. Consumers expect access to the big systems, and insurers must include them. That is the description of an oligopolistic market for health care. Nothing that happens in the exchanges or among the Ryan-esque Medicare plans will change that dynamic. Eighty to eighty-five percent of the cost of health insurance is driven by the cost of health care. Costs determined by the health care oligopolists will inexorably drive up the costs of health insurance.

A 2011 RAND study found that “hospital markets are much less competitive than health plan markets nationally and, importantly for consumers, that hospitals operating with little competition are able to charge health plans much higher prices, which are passed on to consumers in the form of higher insurance premiums.”

Anna Wilde Mathews, writing in the August 27, 2012 Wall Street Journal cites hospital acquisition of physician practices as another cost driver that is immune to health insurance competition. She notes that prices for procedures can double after an acquisition, sometimes even when the procedure is performed by the same people in the same facility with the same equipment.

The Health Care Cost Institute published a study of health care costs in May of 2012, based on an analysis of commercial insurance claims from over 33 million beneficiaries of several large carriers. The Institute found that “the increase in per capita health care expenditures from 2009 to 2010 was primarily driven by higher unit prices and not by the utilization (amount) or intensity (mix) of services.” This was in the wake of the Great Recession, when competitive pressure should have been driving prices down, as in other markets. But competition among the major carriers who provided the data for this study had no apparent effect on prices charged for care.

In this study, increases in the cost of care determine increases in the cost of health insurance, in a way that competition, even among major insurance carriers, could not alter.

The policies of both parties regarding affordability of health care are built on a myth. Expecting competition among health insurers to control the cost of health care is akin to expecting competition among auto manufacturers to control the price of gasoline.