Why a Public Plan Is Unnecessary to Stimulate Competition

Abstract

Proponents of a public health insurance plan, including President Obama, claim it is needed to stimulate competition. This paper challenges that claim from a national, state and local perspective. The evidence shows that at the national level the health insurance market generally is highly competitive for the 61 percent of privately insured Americans who now purchase their coverage through large groups.

At the state level, concentration in health insurance markets appears less disturbing than it appears for two reasons. States generally are too large to constitute a meaningful market for purposes of assessing antitrust concerns, and the limited empirical evidence that is available does not suggest that states with a dominant insurer suffer any significant adverse consequences. First, most concentrated markets tend to be dominated by nonprofit plans (mostly Blue Cross/Blue Shield plans). Second, market concentration is not necessarily associated with adverse outcomes. For nonprofit Blue Cross/Blue Shield plans, increased market share historically has been associated with lower payments to providers, lower administrative costs and lower premiums. Even today market concentration among health insurers has a relatively small effect on current premium levels or recent rates of growth in health spending. The available evidence is inconsistent with the view that concentration is allowing health insurers to exploit their members. Instead, it squares with a more plausible view that concentration in the health insurance industry has provided a useful corrective to the more disturbing growth in concentration of hospital and physician markets over the past decade.

Even at the local level, roughly three-quarters of local markets that appear to have weak competition are dominated by nonprofit plans. Such plans are no different than a public plan in terms of profit motive. In areas where lack of competition adversely affects those seeking to purchase health insurance, policymakers should consider more effective tools to restore competition that would be superior to reliance on a public plan. These include more effective state regulation of the individual and small group markets, more aggressive antitrust enforcement and allowing interstate sales of health insurance.

Finally, real world experience with the Medicare drug benefit (where fierce competition among private health plans has contributed to cost savings of nearly 40 percent), the Federal Employee Health Benefits Program (which for decades generally has experienced lower premium growth than private health insurance and Medicare) and the State of California (whose market-oriented approach to health care has reduced its level of spending relative to the U.S. by nearly one-third in just twenty-five years) have demonstrated convincingly that competition among private insurers can work very effectively even without a public plan.

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Christopher J. Conover is a research scholar and director of the Jim Bernstein Health Policy Scholars Program at Duke University's Center for Health Policy. Thomas P. Miller is a resident fellow at AEI.

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