Posted by David Hyman: Health Insurance and the Public Plan: Where's The Beef? http://volokh.com/archives/archive_2009_06_21-2009_06_27.shtml#1245963524
The proposal to allow a public plan (also called a �public option� or a �government plan� depending on the normative atmospherics one wants to signal) to compete directly with private health insurers [1]has become one of the hottest flashpoints in the debate over health reform. President Obama spoke to the issue [2]earlier this week and yesterday�s Wall Street Journal had a [3]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) [4]Tyler[5] Cowen, [6]Tim Greaney, [7]Jacob Hacker,[8] Ezra Klein, [9]Arnold Kling, [10]Paul [11]Krugman, [12]Megan McArdle, and [13]Frank Pasquale. The Cato Institute had a [14]conference last week on health reform where there was a panel on the public plan at which I spoke, along with Cathy Schoen (Commonwealth Fund), Gail Wilensky (former administrator of CMS - then called HCFA) and Karen Davenport (Center for American Progress). A recent [15]New York Times poll showed strong support for the public plan, but[16] critics quickly pointed out those polled skewed heavily Democratic. Design details matter; part of the complexity is that different groups are using the same words - "public plan" -- to refer to very different proposals. For example, the [17]Commonwealth Fund's version of a public plan is radically different than the one put out by the [18]New America Foundation. Leaving that complexity aside, proponents argue that the public plan will improve the performance of the market, by creating more options and keeping the insurance companies �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 provide consumers with 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. The original source of these statistics is a [19]series[20] of papers[21] on HMO and PPO market share done by the American Medical Association, written to support their larger legislative agenda of allowing joint negotiation of fees by independent physicians and tightening regulation of health insurers. In 2004, Professor James Robinson published a [22]paper in Health Affairs on the subject, providing detailed information on market concentration in all 50 states, for HMO/PPO and commercial insurance. Let's ignore the irony that the AMA's work has provided the intellectual foundation for the Obama Administration to propose a public plan -- [23]which the AMA has now come out against. Instead, focus on whether the proffered statistics actually prove what they purport to establish. As I outlined in a [24]paper in Health Affairs I co-authored several years ago, there are numerous difficulties 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 HMOs and PPOs also omits other options � such as self-funded ERISA plans (for large and small groups) and high-deductible health insurance plans (for individuals, often coupled with a health savings account). If the state is, in fact, the relevant market, all options need to be included for the market share/concentration ratios to mean anything. 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 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 not been pro-competitive). Let's be concrete. 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 direct and obvious (and standard approach, if history is any guide) is to address the problem head-on � by bringing cases against violators, eliminating state-created barriers to entry, and otherwise trying to address the source(s) of market failure. 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 private 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 primary justification for a public plan in the first place. Leaving all that aside, it is important to remember that consumers are harmed by both monopoly and monopsony. So, proponents might view the monopsony purchasing power of a public plan as a feature, but its actually a bug. In my next post, I will address the "maverick" issue. This issue involves a series of sub-claims: that a public plan will have lower administrative costs than a private plan; that a public plan will behave differently than a private plan; and that we should not have a "level playing field" for purposes of regulation and taxes because doing so will strip the public plan of its "inherent advantages." References 1. http://www.washingtonpost.com/wp-dyn/content/article/2009/06/23/AR2009062303386.html?hpid=topnews 2. http://www.nytimes.com/2009/06/24/health/policy/24health.html 3. http://online.wsj.com/article/SB124580516633344953.html 4. http://www.marginalrevolution.com/marginalrevolution/2009/06/the-public-plan.html 5. http://www.marginalrevolution.com/marginalrevolution/2009/06/what-does-the-public-plan-equilibrium-look-like.html 6. http://www.stltoday.com/stltoday/news/stories.nsf/editorialcommentary/story/0A0D849E52BCD7D4862575B3007EECDF?OpenDocument 7. http://institute.ourfuture.org/report/2008125116/case-public-plan-choice-national-health-reform 8. http://voices.washingtonpost.com/ezra-klein/2009/06/health_care_reform_for_beginne_3.html 9. http://econlog.econlib.org/archives/2009/06/the_purpose_of.html 10. http://www.nytimes.com/2009/06/05/opinion/05krugman.html?_r=1 11. http://www.nytimes.com/2009/06/22/opinion/22krugman.html 12. http://meganmcardle.theatlantic.com/archives/2009/06/the_benefits_of_a_public_healt.php 13. http://www.concurringopinions.com/archives/2009/06/public-option-as-private-benchmark.html 14. http://www.cato.org/events/healthcarereform/index.html 15. http://www.nytimes.com/2009/06/21/health/policy/21poll.html?_r=2&partner=rss&emc=rss 16. http://www.cnsnews.com/public/content/article.aspx?RsrcID=49999 17. http://www.commonwealthfund.org/Content/Publications/Fund-Reports/2009/Feb/The-Path-to-a-High-Performance-US-Health-System.aspx 18. http://www.newamerica.net/publications/policy/modest_proposal_competing_public_health_plan 19. http://www.ftc.gov/os/comments/healthcarecomments/womansclinicattatch5.pdf 20. http://www.ama-assn.org/amednews/2009/03/09/bisb0309.htm 21. http://www.marketwatch.com/story/study-confirms-health-monopoly-fears 22. http://content.healthaffairs.org/cgi/content/abstract/23/6/11?ijkey=a489a177d1348770d8ea7aadbaa9d9fa28a896f1&keytype2=tf_ipsecsha 23. http://www.nytimes.com/2009/06/11/us/politics/11health.html 24. http://content.healthaffairs.org/cgi/content/abstract/23/6/25
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