The provider-insurer balance of power

Uwe Reinhardt puts his finger on the issue I’ve been puzzling about for over a year, and blogged about many times. How can increased competition among insurers decrease health insurance premiums when the vast majority of premium dollars flow to medical providers? On the Health Affairs blog, he writes,

The bulk of the medical benefits procured by an insurer for residents in a given market area are produced by providers within that market area. In general, both private and public insurers have only limited, if any, control over the volume of the medical benefits that local clinical decision makers ask insurers to purchase for the insured. Furthermore, the larger the number of insurance companies active in a local market, the smaller any insurer’s market share will be — other things being equal — and the less leverage any insurer will have in bargaining with area providers over the prices of health care. …

The current nouvelle vague – so-called Accountable Care Organizations (ACOs) – will only further encourage that concentration. I find it hard to believe that, in the face of this trend, fragmenting the buy side of health care even more would serve the goal of cost containment.

Ideally, in my view, the market for health insurance would be oligopolistic, which means that only a few insurers — each with some market clout vis à vis providers — would compete for enrollees in a local market. What the ideal number would be is an interesting question on which economists can have a lively debate.

So what am I missing here? Why do so many otherwise sensible people believe that fragmenting the buy side of the health care market even more than it already is will help contain the rising cost of health care? I would argue just the opposite.

I invite readers and fellow bloggers to enlighten me.

Reinhardt should not hold his breath. I can think of no sensible argument that–holding all else constant–starts with a reduction in insurers’ market power and ends with a decrease in medical costs and health care premiums. However, if one is willing to add in other elements of reform, I can think of some possibilities that include increased insurer competition. For example, if insurers are permitted to collude to set all-payer rates to medical providers then they can maintain a high degree of leverage over providers while competing vigorously for policyholders. Or, the provider market could be commensurately diluted so that the relative provider-insurer balance of power was held constant.

Do you think for a second either of those things will happen (all-payer rates setting or the break up of dominant hospitals)? I don’t either. If insurers can’t constrain medical costs in the private health care market we’re likely to get, what will? This question has not yet been answered or even sufficiently debated.

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