Posted by David Hyman: Health Insurance and the Public Plan: Where http://volokh.com/archives/archive_2009_06_21-2009_06_27.shtml#1245960824
The proposal to allow a public plan (also called a �public option� and a �government plan�) to compete directly with private health insurers as part of the proposed �health insurance exchange� has become one of the hottest flashpoints in the debate over health reform. President Obama spoke to the issue earlier this week and yesterday�s Wall Street Journal has a lengthy op-ed by (former Labor Secretary) Robert Reich on the subject. Many others have been heard on the subject as well � including (in alphabetical order) Tyler Cowen, Tim Greaney, Jacob Hacker, Ezra Klein, Arnold Kling, and Megan McArdle. Proponents argue that the public plan will improve the performance of the market, by creating more options and keeping the insurance copies �honest.� Critics argue that a public plan will be an unfair competitor, and will inevitably dominate the market. There are different ways of conceptualizing the debate � I�m going to organize my analysis around the three M�s of a public plan: Monopoly, Monopsony, and Maverick. (I had a former colleague who told me the key to a good title for an article or speech is to pick three words that all start with the same letter, and use them to organize the analysis. So, monopoly, monopsony, and maverick it is). I�ll concentrate in this post on monopoly and monopsony. Proponents of a public plan argue that the market for health insurance is monopolistic, and that a public plan will consumers more options � thus making the market more competitive. The assertion that the health insurance market is monopolistic is usually based on some throwaway claims about the number of mergers of health insurers over the past several years, followed by statistics on market share or market concentration of health insurers in all 50 states. See, e.g., here, and here. The original source of the market share/concentration statistics is a series of papers done by the AMA, written to support their larger legislative agenda of allowing collective bargaining by independent physicians and tightening regulation of health insurers. As I outlined in a paper in Health Affairs I co-authored with (FTC Commissioner) Bill Kovacic several years ago, there are numerous problems with this approach to determining whether there is a monopoly problem in health insurance. (There may well be other problems with health insurers � but let�s put those aside for the moment). First, counting up the number of mergers doesn�t tell you anything useful at all. Mergers across discrete geographic and product markets are unproblematic, while mergers within such markets may or may not raise antitrust issues. Second, although states are a natural regulatory unit, the marketplace for coverage often does not track state borders � and market share/concentration ratios for something that isn�t a market are meaningless. The AMA�s focus on the market share of state-regulated insurance companies also omits other options � such as self-funded ERISA plans (for large and small groups). It is less clear whether the analysis includes high-deductible health insurance plans (for individuals, often coupled with a health savings account). If they are included in the analysis, the market share/concentration figures will be lower. Third, market concentration ratios are a screening tool � and no one with antitrust enforcement responsibility in the past several decades has thought that de-concentration in the absence of an actual antitrust violation was a strategy that would go anywhere in court, or had much of anything to recommend itself as a general policy. This doesn�t mean that there are no problems with health insurer performance � nor that no health insurance markets are oligopolistic � but you can�t answer those issues in the abstract or assume that there�s an antitrust problem, or that there isn�t such a problem � you have to actually go and look. More importantly, if you think there is actually a monopoly problem in certain coverage markets, then we have an established and time-tested way of dealing with that -- prove it up, and use the remedies provided for by the antitrust laws. The principal remedy is structural � break up the monopoly, and restore competition to the market. As far as I can tell, in the entire history of antitrust, no one has ever thought a plausible response to a monopoly is for the government to go into the business of providing the monopolized services, in order to create some competition. (And, as I will detail in a subsequent post, when the government has gone into the business of providing insurance, the results have been neither pretty nor pro-competitive). The government is currently investigating Intel and Google, and previously prosecuted Microsoft for antitrust violations � but anyone who suggested that the way to address a monopoly in these areas was for the federal government to go into the business of developing computer chips, web browsers and search engines would have been laughed out of the antitrust bar. If you want more competition in the market for health insurance, the most obvious (and standard approach, if history is any guide) is to address the problem head-on � by prosecuting violators, eliminating state-created barriers to entry, and otherwise trying to address the source(s) of market failure -- if there in fact is one. Next, monopsony. If a public plan can rely on Medicare�s purchasing power and pricing, it can probably under-price private insurance � although if proponents of a public plan are right that private insurers have a monopoly position in the market, its hard to see how a public plan gets much more leverage than that. And, if existing insurers don�t have enough market power to engage in monopsony pricing, that means there isn�t a monopoly problem in the coverage market � which after all was the claimed reason for the public plan in the first place. Leaving all that aside, it is important to remember that monopoly and monopsony are mirror image problems, and consumers are harmed by both. So, proponents might view the monopsony purchasing power of a public plan as a feature, but its actually a bug.
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