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Public option: less than advertised

One of the fundamental arguments for having a public option as part of future health-insurance exchanges is that the increasing consolidation in insurance markets has reduced competition among insurers, thereby driving up premiums. Having a public option, the argument goes, would introduce needed competition into these markets -- keeping insurers "honest," as President Obama has put it. But has this trend toward consolidation actually resulted in higher premiums? The answer, according to a new working paper by researchers affiliated with the National Bureau of Economic Research, is yes, but not by very much. The real losers from more concentrated insurance markets seem to be doctors, whose earnings are driven down.

Economists Leemore Dafny, Mark Duggan and Subramaniam Ramanarayanan examined a boat-load of data from 1998 to 2006: 10 million individuals enrolled in more than 800 employer-sponsored health plans in 139 markets across the country. First, the authors looked at whether premium growth was associated with increased concentration in the particular market. They found no evidence "that premiums are rising more quickly in markets that are becoming more concentrated during the 1986 to 2006 period." But this does not, in itself, rule out a causal connection between market concentration and premium increases. "For example," they write, "consider a market with a struggling local economy. In such a market, consumers may flock to low-priced carriers, bringing about an increase in local market concentration and a simultaneous reduction in average premium growth."

To see if there was any cause-and-effect between market concentration and premium increases, the authors then considered the specific impact of the 1999 merger of two insurance industry giants, Aetna and Prudential Healthcare. The two insurers were active in most local markets, but their share of the markets varied significantly in different areas. They find that after the merger, premiums increased in accordance with the overlap of market share. Extrapolating from that result, the researchers estimate that consolidation increased premiums "in a typical market" by 2.1 percent. "Our results confirm that Americans are indeed paying a premium on their premiums," the authors conclude. "However, consolidation explains very little of the steep increase in health insurance premiums in recent years. While 2.1 percent is large in absolute terms -- and large relative to industry profits -- "it pales in comparison to the doubling in real premiums for our sample during the same 1998-2006 time period."

The insurers do use their increased market clout, it turns out, to extract lower prices from doctors. The Aetna-Prudential merger, the study found, reduced physician earnings in a typical market by 2 percent. (Nurses benefited, with earnings up .4 percent.)

This is not an argument against the public option. It does suggest that the impact of the public option, especially in its current form, would be less than its adherents have advertised.

By Ruth Marcus  | November 5, 2009; 4:30 PM ET
Categories:  Marcus  | Tags:  Ruth Marcus  
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Comments

Ruth, it is totally cool to see you reprinting insurance company lobbyists' reporting verbatim. Sure saves time and effort, doesn't it?

Now, how about learning how to do some reporting of your own: well, then what *does* cause the premium increases? And what really is the argument for the public option? What about that ~15-18% of premium cost that goes to executive compensation, shareholder relations, marketing and profits? Won't that go down dramatically?

And why is it that only ~80% of premium dollars in private insurance goes to medical care, as opposed to 95%+ for the private plans in Germany and France? or the 90%+ in the US prior to 1990?

Oh, that wasn't in the stuff fed to you by the lobbyists? I'm sorry, I mistook you for somebody in the news business.

Posted by: Dollared | November 5, 2009 7:18 PM | Report abuse

As a self-employed/self-insured couple (no kids) whose premium has increased from $134/month (10 years ago) to $768/month (now) while deductible (for each of us) increased from $2,000 year to $5,000 year (etc.), That our business is tanking as our premiums (etc) rise is scaring the crap out of us.

I just wanna know if & how the public option and/or exchange could help us.

Put another way -- what is reasonable & fair?

What percentage of income paid for health insurance is fair?

Posted by: dadada | November 5, 2009 8:45 PM | Report abuse

Ezra Klein argues the superiority of the House Democratic plan, which, he says, covers more people (about 30 million) and “saves $36 billion more than the Republican plan.”  However, that Democratic plan doesn’t include the costs of the “doctor fix”, which apply to the Democratic bill because they use Medicare and Medicaid to expand coverage — which is why the Democratic plan will not save any money at all.  But let’s say for a moment that we accept that number.  Why would we spend an additional $1 trillion to “save” another $36 billion?  That would be a waste of 97% of the expenditure.

The House Democratic plan also “saves” money by playing around with pricing (and ignoring their parallel compensation boost), not through actual savings, and even those savings expire in the second decade.

Do the math and you'll see it's a shell game the Democrats are playing..... Earlier today, Rep. John Yarmuth(D-KY) said, "We all know that...We all know taxes and premiums will go up.... We all know a family of four's taxes will go up.... No body has ever said we're gonna bring the costs down ... No body EVER believes we can actually bring costs down ...and the truth is we can't ."

Earlier today, while listening to an interview I heard, "Dems don't lower any costs... The GOP lowers costs by 10%...GOP plan allows competitive pricing to be forced on Insurance Companies and allows Americans to CHOSE. The GOP plan is the bill the president should sign, not the Democrat's plan." ..... Doug Holtz-Eakin/ Fmr. CBO Director 1:27PM EST 11/5/09 .

Posted by: Spartann | November 6, 2009 12:10 AM | Report abuse

Dollared: "What about that ~15-18% of premium cost that goes to executive compensation, shareholder relations, marketing and profits? Won't that go down dramatically?"

The answer is, no. The 15% of premiums that goes to admin costs includes the items you mention as well as many others, such as fraud detection. Unless a public option wants to follow the Medicare model and get ripped off for untold billions year after year, then the PO will need to devote adequate resources to fraud detection. Also, since a PO would not be a monopoly like Medicare, it would incur marketing expenses in advertising its product. And of course, a PO will have staff sitting in cubicles in office buildings just like everyone else, and by golly that's gonna cost money too.

Bottom line: average profit level in the health insurance industry is 3% of revenues. A PO presumably wouldn't make a profit, so you get savings there. After that, you don't get much. The public option is a fraud because there is no massive savings associated with a public option. It's just the first step on the road to a single payer system and that's why the left is pushing it.

Posted by: easyrider | November 6, 2009 8:22 AM | Report abuse

What's the protocal, these days? Can you say - RETARDED? Or is that, like the 'R' Word? Cause you have to be RETARDED, to think that the FEDERAL GOVERNMENT running ANYTHING, is gonna be BETTER or CHEAPER, than the Private Sector.
Everyone keeps talking about 'COMPETITION'. A Company that runs on PROFIT, can not COMPETE with an entity that; #1 - DOESN'T run on a Profit Base. #2 - Can PRINT MONEY if it needs to. And #3 - Sets the REGULATIONS that the PROFIT Company, BY LAW, has to follow. This is all about what Democrats used to love to MIS-QUOTE Newt Gingrich, on. It's about making Private Insurance Companies 'WITHER ON THE VINE'.
We've got little Karl Marx ON TAPE. "I am personally FOR a SINGLE PAYER SYSTEM. We're not gonna be able to get there, right away. It might take 10 - 15 Years before we can ELLIMINATE EMPLOYER BASED INSURANCE COVERAGE."
For ONCE, can we take this Jive Talking, Street Hustling, PUKE, at his WORD?

Posted by: GoomyGommy | November 6, 2009 10:45 AM | Report abuse

The fact remains that big insurance by refusing care to patients and reimbursement to doctors over typos has ticked everyone off. They have a monopoly over the whole process and a well financed lobby team (including Lieberman's wife) and representatives on both sides of the isle.

A friend of mine recently laid off just he and his spouse is paying $2,500.00 dollars a month for his COBRA. Health insurance costs more than his mortgage. Anyone taking up the insurance industry's cause doesn't know what they are talking about.

If you think the insurance companies are going to voluntarily lower their cost while having a monopoly over the process – you are being disingenuous …Over 60% of all US bankruptcies are attributable to medical problems. Most victims are middle class, well educated and have health insurance - (The American Journal of Medicine)

The insurance companies and their representatives in Congress would love to perpetuate a business model that is crippling our overall economy – a bunch of great Americans aren’t they?

90% of the wealth concentrated in 1% of the population is no way to run a country but a heck of a way to establish a royalty ruling class. Yacht sales can not sustain 350 million people. I'm for the public option, competition and a level playing field or break up the big insurers like we did AT&T.

Paul Burke
Author-Journey Home

Posted by: JourneyHomeBurke | November 6, 2009 11:24 AM | Report abuse

Hey Journey Home...I use my phone less than I ever have , but last time I checked ...my telephone bill is way higher than it ever was back in the Ma Bell owns every thing days,,, and the service is worse now too....

Posted by: Spartann | November 6, 2009 12:05 PM | Report abuse

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Posted by: atlasfugged | November 6, 2009 6:48 PM | Report abuse

I am not going to argue the merits of the public option and I won't address Spartann's comments, other than to say that the GOP plan does not address healthcare costs, but instead focuses on reducing insurance premiums. Most analysts agree that, if one assumes that insurance companies would be voluntarily compelled to pass any savings they achieve to their consumers, premiums may decrease slightly under the GOP's plan. What the GOP does not trumpet loudly is how its plan goes about achieving those potential savings. The GOP proposes the creation of state high risk insurance pools which would absorb the uninsurable and those pruned from the insurance companies roster of insured. The effect, of course, is to reduce the insurance companies risk profile and, if one again assumes that savings are necessarily passed onto customers, premiums are thusly reduced. The rub, however, is those savings are achieved at the expense of the state and, by implication, the state's taxpayers.

Posted by: atlasfugged | November 6, 2009 6:52 PM | Report abuse

(cont'd - Hey Washington Post: How about informing users that they've reached the character limit instead of giving them some cryptic message about holding their comment for approval?)

The reasoning which underpins Ms. Marcus' argument above is logically incoherent. Ms. Marcus article proceeds as the follows. First, she claims "increasing consolidation in insurance markets has reduced competition among insurers, thereby driving up premiums". Next, she cites a study which purports to show that consolidation in the insurance market has not resulted in dramatic increases in premiums. One of the central arguments supporting a public option is that it would introduce competition in the insurance market. Ms. Marcus acknowledges this. Somehow, she concludes that, because consolidation does not affect insurance premium strongly, "the impact of the public option, especially in its current form, would be less than its adherents have advertised". The conclusion does not follow. How does consolidation in the private insurance market affect the competitiveness of the public option? The central argument behind the public option is that it introduces external competition, not that it encourages fragmentation in the market for private insurance. Weakening the argument that increasing consolidation in insurance markets has driven up premiums, does not per se diminish the argument that the public option increases competition.

Indeed, the study seems to point to a dysfunction in the private insurance market or, at least, demonstrates that savings which insurance companies achieve through consolidation (e.g. savings obtained from increased bargaining power) are not passed along to customers in the form of significantly reduced premiums. One would expect premiums to be significantly less in a competitive market than a non-competitive one. Since, the study shows that they are not, it would seem from the perspective of a customer that the market is inefficient. However, the study also reveals that consolidated insurance companies do reduce their costs by negotiating lower payments to doctors. Since, premiums remain relatively constant with respect to competitive markets, it's safe to assume this reduction in costs is simply pocketed as additional corporate earnings. Whatever market efficiencies that exist are exploited by the insurance companies on behalf of the insurance companies, not the consumer.

Posted by: atlasfugged | November 6, 2009 6:55 PM | Report abuse

The Obama healthcare plan the dems are voting on is nothing but a Trojan Horse for the labor unions. The Feb stimulus bill has a section about the health care and demands the doctors, nurses and health care providers by unionized. I do not want a doctor or nurse who is forced to join a labor union! I wish this administration and congress would just get busy helping us create jobs and get out of running and ruining our lives!!!

Posted by: annnort | November 7, 2009 5:24 AM | Report abuse

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