THCB

The Commonwealth Fund Gets It Wrong

flying cadeuciiA new report from the usually sensible Commonwealth Fund got lots of media attention this past week. The report –“Competition Among Medicare’s Private Health Plans: Does It Really Exist?” –quickly led to headlines like “Is private-sector Medicare becoming a monopoly? [PBS]” and “Robust Medicare Advantage competition almost non-existent [Modern Healthcare],” and “Health insurance is staggeringly uncompetitive in America, and is poised to get even worse for everybody [Quartz].”

It sounds like Medicare Advantage is headed for disaster, but is this really the case?

The Commonwealth report’s major findings are summarized in one sentence, likely the one that grabbed media attention: “Using a standard measure of market competition, our analysis finds that 97 percent of markets in U.S. counties are highly concentrated and therefore lacking in significant [Medicare Advantage] plan competition.”

The “standard measure” used by the Commonwealth authors is the so-called Herfindahl-Hirschman Index. This grandiosely-named tool takes the squares of the percentages of each competitor’s share of a market and totals them to arrive at a numerical score. The Commonwealth report provides two examples of interpretation of the HHI score:

“Region A has five firms, with market shares of 40 percent, 30 percent, 20 percent, 5 percent, and 5 percent. The HHI would therefore be: 1,600 + 900 + 400 + 25 + 25 = 2,950. Market A would be described as highly concentrated, or less competitive.

“Region B has 10 firms, each with equal market shares of 10 percent. The HHI would be: 10 × 100 = 1,000. Market B would be described as non-concentrated, or more competitive.”

The fallacy of this approach becomes obvious if we consider an extreme example in which a region has one hundred health plans with a one percent market shareeach. The Commonwealth logic would indicate this to be a very highly competitive market.  The reality, however, is that every plan would be at its providers’ mercy and unable to cover its fixed costs with affordable products.

As the extreme example shows, having more competitors does not necessarily result in more effective competition in the sense that consumers get a more affordable or better quality product. Equally, having fewer competitors – short of a monopoly – doesn’t necessarily lead to less competitive products. (Just ask Boeing or Airbus if there’s inadequate competition in their two-manufacturer market!)

The Commonwealth authors counted the number of MA health plans and their respective market shares in each region, and then computed the respective HHI scores to reach the findings quoted above. The first part of the findings – that almost all markets have relatively few health insurers — is unarguable, although whether it is appropriate to characterize them as “highly concentrated” (a term attached to HHI scores) is more questionable. What is even more questionable is the implication that consumers are suffering as a result. The Commonwealth report tries to justify this by saying “Generally, greater competition [i.e. more competitors] is seen as beneficial to consumers and purchasers, in terms of controlling costs and promoting quality. This has been found to be true in health care markets as well….”

Well, not exactly. The few studies of health insurance markets cited in the Commonwealth report are much more ambivalent. The most extensive regression analysis study (of a segment of the large group market), published by the National Bureau of Economic Research in 2009, found no overall correlation between market concentration and premium growth.Theresearch did produce two other (somewhat contradictory) conclusions. The first was that insurer market concentration resulted in lower physician earnings (as expected when purchasers have more power). The second, obviously relevant to current merger proposals, focused on Aetna’s acquisition of Prudential’s healthcare business in 1998 and concluded that in this case the increase in market concentration resulted in a significant increase in annual premiums, of up to seven percent. However, two caveats must be made: The impact on Aetna of the Prudential acquisition on top of a still-in-process takeover of New York Life’s healthcare business was near-disastrous, and it is at least possible that the apparent high increase in premiums may have been due to Aetna’s troubles at the beginning of the study period. It is also possible that the seven percent number is overstated; for the mostly self-funded groups in the study, this would amount to a fifty percent increase in fees (assuming claims costs were unaffected), an unreasonable bone for any company benefit manager to swallow.

None of this uncertainty stopped the Commonwealth authors from making another leap of logic. Having bemoaned the level of MA competition, they then decided that increasing competition in the broader Medicare program through, say, a premium support approach, may not be desirable and conclude (roll of drums): “The benefits of competition can be relied on only in markets where the elements of competition exist. It is not clear that merely expanding the role of private plans would improve Medicare’s ability to serve its beneficiaries, either in terms of the quality or cost of care.”

The reader may well be bewildered. If more competition in MA is good, why is this not also true for Medicare as a whole? The Campaign for a Rational Healthcare System estimates (based on studies by the Congressional Budget Office and by the Kaiser Family Foundation) that a premium support model for Medicare could save up to $30 billion a year and provide enhanced basic benefits. Maybe the Commonwealth Fund should get over their infatuation with the HHI index and focus on ways to cut Medicare costs.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  He is the founder of The Campaign for a Rational Healthcare System.

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