Published September 16, 2009
"Consumers do better when there is choice and competition. Unfortunately, in 34 states, 75% of the insurance market is controlled by five or fewer companies. In Alabama, almost 90% is controlled by just one company. Without competition, the price of insurance goes up and the quality goes down...an additional step we can take to keep insurance companies honest is by making a not-for-profit public option available in the insurance exchange..."
-- President Barack Obama, September 9
Two claims are made all the time in the health care debate: 1) that there is little competition among those providing health insurance and 2) that it is important to take the profit motive out of providing health insurance. Both are myths. It turns out that claims about too little competition are based on a misinterpretation of the data and that non-profit insurers are so abundant that the largest insurer in virtually every state is a non-profit.
You would probably never know either of these points from listening to the news. Proponents of government provided health insurance, such as President Obama, argue that such a government option is required to inject competition into the market. "Insurance companies and their allies don't like this idea, or any that would promote greater competition," Mr. Obama warned during a weekly Saturday radio address during the end of August. Even those who don't support a government option are concerned about the lack of competition. "There is a serious problem with the lack of competition among insurers," said Republican Senator Olympia Snowe of Maine. "The impact on the consumer is significant."
Several studies point to how concentrated the health care insurance market is. A 2008 study by the American Medical Association shows that one or two health insurance providers dominate the market in most states, implying that the providers could be exploiting a monopoly-like situation to generate "excessive" profits.
Click here to view table with breakdown.
But they leave out the fact that for most people it is their employer, not the insurance companies, that pays for any bad health outcomes. The firm does so out of the company’s own pocket. The companies do what is called “self-insure” or “self-fund” their plans, and that occurs for around 55 percent of employees according to the Agency for Healthcare Research and Quality with the Department of Health and Human Services.
Take Maine, Senator Snowe's state, as an example. There, the two largest insurance companies appear to control 88 percent of the market. And Well Point Inc. makes up most of that, with 78 percent. But what isn’t made clear is that these numbers only deal with privately insured patients who are insured by insurance companies. Slightly over half of the privately insured in Maine (52.1 percent) get their insurance through their employers who "self-insure." These companies merely hire other companies to handle the paper work. Well Point Inc. thus really provides primary or "full" insurance to 78 percent of the market not covered by self-insurers. Doing the math gives 78 percent x (1 - 52.1%) = 37.1 percent of the total market in Maine. The second largest insurance company has only 4.8 percent of the total market.
For Alabama, instead of the “almost 90% is controlled by just one company,” as the president claims, the correct number is 36 percent. The second largest company has just 2.1 percent of the market.
Click here to view a table with the breakdown.
Not only is 37 percent a lot less concentrated than 78 percent, but the 52.1 percent covered by self-insurers is extremely competitive. Thousands of employers in Maine are self-insurers, and they compete for workers not only on the basis of the salary that they pay, but also on the benefits that they offer.
It is not just Maine. We can look at the 15 "top" states, those with the very highest market share taken by the two largest insurance companies. The pattern is fairly similar. On average over 57 percent of people with insurance in those states get their insurance from companies that self-insure.
So what about President Obama’s claim that in the 34 states most concentrated states 75 percent of the insurance market is controlled by five or fewer companies? Given that self-insured firms cover 57 percent of people insured in those states, the correct total market share for the largest five firms control is 32 percent, not 75 percent.
Ernie Clevenger, publisher of “My Health Guide” (a self-insurance industry newsletter), told FOX News that he estimates that there are about 900 Third Party Administrators (TPAs) —companies that are hired by self-insured businesses to handle their employees' policies. A big difference with primary or full service insurance is that these TPAs can compete across state lines.
These TPAs can handle customer service, can deal with health care providers, and can deal with regulatory requirements. Most employees get an insurance card from these administrators and many wrongly believe that the insurance company listed on the card is the one providing the insurance. The costs of administering these policies are actually quite small, accounting for merely about 3 to 5 percent of the total cost of insurance. The self-insurers may also purchase so-called “stop loss” or “medical excess” insurance, which protects companies who self-insure from extremely large losses, but the cost of this comes to only about $5 per employee per month and may well be purchased separately from one of 70 companies that provide this service.
The Kaiser Foundation estimates that self-insured companies covered about 75 million out of 137 million workers in 2008. The largest of the Third Party Administrators, Broker Concepts located in Philadelphia, covered only up to about 700,000 employees -- not a high market share. Jerry Castelloe, a senior vice president with Coresource, the third largest TPA, claims that "the typical client is looking at 6 to 10 options at renewal" from different TPAs. According Mr. Clevenger there is a "huge amount of competition" in offering these self-insured policies.
Given all the attacks on profit-making insurance companies, what is possibly more surprising is that by far the dominant players in the "full" insurance market are non-profits. Indeed, one of the motives of the government insurance option is to take profits out of the picture. "But having a public plan out there that also shows that maybe if you take some of the profit motive out, maybe if you are reducing some of the administrative costs, that you can get an even better deal, that's going to incentivize the private sector to do even better. And that's a good thing," President Obama told the nation during his July 22nd press conference.
Yet, in 29 of the 43 states that data are available for in the American Medical Association report mentioned earlier, the dominant company in the "full" insurance market is a non-profit company. In state after state, Blue Cross and Blue Shield hold the largest market share. On average, the largest non-profit hold over half of the “full” market share in those 29 states. Why add another non-profit operation to the mix?
Getting rid of profits wouldn’t make costs go down – they would go up, because without profits there would no longer be the same incentive to hold down costs. Profits are the reward that firms get for figuring out what customers want. Earl Grinols, Distinguished Professor of Economics at Baylor University and author of a new book from Cambridge University Press entitled “Health Care for Us All,” argues that “profit maximization combined with competition is the only reliable way that we know to keep costs low.”
Non-profits obtain the success they do largely because of tax and regulatory advantages offered to them by the government (e.g., somewhat higher federal taxes on for-profit corporations).
So much of the debate focuses on the supposed heavy concentration in the insurance industry and the supposed greed, costs, and inefficiencies of for-profit companies. Private insurance medical insurance is neither very concentrated nor largely for-profit.
John R. Lott, Jr. is a FOXNews.com contributor. He is an economist and author of "Freedomnomics."