Competition in Health Insurance: What Should Government Do?

Many Americans complain that there is too little competition between health plans. To some degree, this is true. Few of us are allowed to choose our own health insurance. Instead, we take whatever our employers offer us.

However, we must not succumb to the natural temptation to call for more government intervention to reverse this problem. On the contrary, concentration among health plans has largely occurred subsequent to government action.

Signed in March 2010, ObamaCare has certainly had the opposite effect than that promoted by its advocates. The table below shows premiums in the small-group market in 2008 and 2010, for 37 states with available data.



In only one state, Utah, did premiums for single coverage in the small-group market drop — by 17 percent. However, the median increase in premiums was 20 percent — one fifth. And the biggest increase, 68 percent, took place in Washington State — a state where the Insurance Commissioner already enjoys the power of “prior approval” of rate increases encouraged by ObamaCare!

A previous study of mine showed that state markets for health insurance became more concentrated during the years from 2003 through 2008, according to the Herfindahl-Hirschman Index (HHI). The HHI measures market concentration as follows: If there are four competitors in a market, each with 25 percent share, the HHI= (25^2) + (25^2) + (25^2) + (25^2) = 2,500. If the shares are 50 percent, 25 percent, 15 percent, and 10 percent, the HHI = (50^2) + (25^2) + (15^2) + (10^2) = 3,450.

For the weighted average of health plans in the 41 states sampled in the previous study, the HHI increased 28 percent over the period, from 2,282 to 3,184. This conclusion, however, must be tempered by the observation that there is no evidence that concentration of health plans within states is significantly worse than concentration of insurers in other lines of business, generally speaking, as shown in my study.

Nevertheless, the HHI is the first place government regulators look when seeking excuses to interfere in markets. A recently released analysis calculates the HHI for 2010, in both individual and small-group markets. For the small-group market, the analysis calculates a national median HHI of 3,595, a slightly higher measure of concentration than estimated in my previous study (which combined the individual, small-group, and large-group markets). The state with the greatest concentration was Alabama, which a score of 9,175; and the least concentrated state was Pennsylvania, with a score of 1,579.

Counter intuitively, the states with the highest degree of concentration do not suffer the highest premiums. On the contrary, the correlation between the states’ HHIs reported here and the premiums reported for 2010 in Table one is negative 0.16! If federal and state regulators look to the HHI as their key measurement of competition in health insurance, it will lead them to do even more harmful interventions than they already have.

John R. Graham is Director of Health Care Studies at the Pacific Research Institute, & Senior Fellow at the National Center for Policy Analysis. This post first appeared at NCPA’s blog.

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3 replies »

  1. What drives costs and premiums higher is provider concentration not insurer concentration. Proof, look to AR and AK. BCBS owns over 75% of the market.

  2. The one thing they could enforce is a tiny bit of integrity for consumers when shopping for insurance as the exchanges seem to be on their way out even before they get started. Lot of companies are getting in to this market. Here’s one for shopping for insurance rates/sales that seems to compete with the government with listing insurance companies and rates, and I guess we are all monkeys now…InsureMonkey…bad name.


    Maybe the government could at minimum initiate a little professional protocol if nothing else at this point as they don’t do the math very well.

  3. I feel like this post totally ignores the issue of supply-side market concentration. Health insurance premiums are largely a reflection of the contracts agreed upon by providers (hospitals, physician groups, pharma, etc) and insurers. The problem is, increasingly these contracts are being forged between health insurers, who admittedly are concentrating, and oligopolies of providers, who are most definitely concentrating. So in many markets the providers have increasing power in these negotiations. Examining HHI from just the buyer side ignores this increasingly important piece of the equation.