Austin Frakt has a good post explaining that market concentration may sometimes be a good thing in health care and that too much competition between insurers could allow providers to dictate prices, leading to higher premiums. The trick is to find the right balance between insurer strength (so that insurers can negotiate for cheaper reimbursement rates with hospitals and doctors, but still feel pressured to pass those savings on the consumers) and provider concentration — ensuring that doctors and hospitals aren’t so dominant that they can just dictate reimbursement rates.
“This all implies there is a sweet spot, a degree of market concentration of insurers relative to hospitals that leads to the lowest premiums. That’s what my figure illustrates,” Frakt writes:
So what would this have meant for the public option, which many progressives touted as the answer to breaking up concentrated health insurance markets and realizing some real premium savings? Well, Frakt is suggesting — as many economists did throughout the health reform debate — that the public plan’s success would have depended on its size, meaning that a plan with millions of members could have gotten away with paying Medicare-like rates that providers wouldn’t have been able to turn down given its very large number of beneficiaries. And, if the plan simply piggybacked on Medicare and relied on its claims processes and fees it would have been able to lower premiums and attract more enrollees. Meanwhile, smaller insurers would didn’t have those kinds of advantages and would have been likely stuck paying providers higher rates.