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.
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