Will a Monopsony Health Insurer Reduce Premiums?

I keep coming back to this question: if a health insurer has considerable market power (even to the point of monopsony) will that translate to lower premiums for consumers? Pauly says “yes” if that insurer is nonprofit.

A 1996 paper by Foreman, Wilson, and Scheffler in Ecnomic Inquiry 34(4) Monopoly, Monopsony, and Contestability in Health Insurance: A Study of Blue Cross Plans is all about this question. It is also one of the early papers (though not the earliest) that recognizes the two-sided nature of the health insurance market (consumers of care on one side, providers on the other).

Foreman, et al. bring in another concept I had not yet considered: contestability. They use the term to include the expectation of competition, not just actual competition. Thus, an insurer can use monopsony power to obtain low provider prices, still be a monopoly with respect to consumers, yet pass savings on to consumers due to the threat of competition. The threat is that other firms would move in and undercut the monopsony/monopoly insurer’s premium prices. Thus, despite being a monopsony and a monopoly, the firm cannot fail to pass savings on to consumers.

Foreman, et al. found that Blue Cross Plans behaved exactly in this way: a monopsony in a contestable insurance market. They observed increased administrative efficiency, reduction of provider payments, and competitive pricing of health plans, all consistent with what is expected of a monopsony in a contestable market.

This is a relatively old paper so I would not claim that the findings are relevant today. I am also not aware of other studies focused on this topic so the findings may be specific to their investigation. Nevertheless, the notion of contestability is worth remembering. A monopoly doesn’t necessarily have monopoly pricing power. A monopsonistic insurer may reduce premiums due to fear of competition.

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