Thursday, March 11, 2010

How Competitive are Health Insurance Markets?

When I talk about the economics of health markets one of the first things health providers talk about is the amount of profit that health insurers make and how they are affecting the entire health care industry. I would say that this is fairly accurate. Health insurance firms do make significant economic profits. Why?

Economists view high profits as a result of a number of forces. One of these is the lack of competition. So are the high profits the result of sinister activities or could it be the result of the lack of competition? One way that we measure market competitiveness is by the Herfindahl-Hirschman Index. An interesting article explains the index and how this relates to the health insurance market.

Turning our attention to the geographic market of Iowa, I would say that the health insurance market is fairly concentrated, which is to say that it is not very competitive - atleast using the Herfindahl-Hirschman Index. Take a look for yourself at the results for the state of Iowa from 2002 to 2008 by HHI and by MSA.

Given the lack of competition, I would argue that if the goal is to reduce profits from health insurers (which I would not say is an efficient goal), then we need policies to increase the competitiveness of the health insurance industry. If the goal is to increase consumer surplus - which I would say is an efficient goal - then we need policies to increase the competitiveness of the health insurance industry. Notice that either way, more competition will achieve both goals.

2 comments:

Ryan said...

I have never understood the logic behind the ban of interstate competition of health insurance companies, other than the political side of being able to provide jobs for these companies in a given state. This seems to me to be a very oligopolistic, sometimes monopolistic, approach to this problem. If a law was passed allowing interstate commerce for health insurance, wouldn't premiums drop off a cliff overnight? This would seem to be a perfect Friedman solution to this problem. Also, even though it is no longer an option in the debate, the 'public option' seems to me to be a very serious impediment to free-market economics. Wouldn't the government effectively become the market maker for the new premium price? Why would a company every use an insurance provider who charges a higher premium?

Stacey said...

Ryan - you are right, eliminating the restrictions on interstate health insurance purchases would make the market more competitive and drive down premiums on private health insurance.