Will More Insurance Competition Make Things Better?

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"Will More Insurance Competition Make Things Better?"

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I’ve been mostly thinking of the idea of passing a stand alone repeal of health insurance companies’ anti-trust exemption as a low-impact piece of political theater. But when I finally got around to watching last week’s House in Tivo, I realized that it’s actually possible this would make things worse. What happens is that the big, evil insurance company tries to force the hospital to accept a lower payment rate. The specific dramatic issue is that the fictional AtlanticNet is the largest insurer in New Jersey and has considerable market power. If Princeton Plainsboro loses its deal with AtlanticNet, they might lose 80 percent of their customers.

Since the show’s characters are all hospital employees, and since everyone hates insurance companies, the episode sets you up to root for the hospital to win against the insurer. But in the real world, lower reimbursement rates are good for patients. One of the main reasons American health care is so expensive by world standards is that our per unit payment rates are so high. Medicare saves money relative to private insurance in part because Medicare has such enormous market power. Doctors are free to reject Medicare patients, but most don’t want to throw all that business away.

If the insurance market becomes much more fragmented (i.e., competitive) then providers will gain bargaining power relative to insurers and costs will go up. In theory, patients will have more choice which could be good. But in practice choice rests with corporate HR departments so it’s not really clear to me what this accomplishes. Increased insurance competition could do good in the context of a well-functioning, well-regulated individual insurance market (an “exchange” in other words) but absent broader reform the main winner would seem to be hospital administrators.

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