Tuesday, June 16, 2009

The Tight Fist of the Invisible Hand: The 'Free Market' for Health Insurance in the US

The Center for American Progress has an interactive map showing that the 'free market' for health care in the US, um, blows:



You can click on states for details; for instance, in Illinois, 69% are insured by the top two companies, Blue Cross Blue Shield (47%) and WellPoint (22%). Says CAP:
Today many Americans have few choices when it comes to health insurance. This is because many insurance markets are dominated by only a handful of firms, even though there are over 1,000 private health insurance carriers in the United States. This concentration limits employers’ and families’ health insurance options as well as the care they receive.

In many states small insurers compete against one another in the individual market to insure only low-risk, healthy individuals. They refuse to insure Americans with pre-existing conditions [ed.: like me!] such as high blood pressure, asthma, cancer, or diabetes and those who have ever taken certain prescription drugs—and they create barriers to needed care for those who are insured.

The map shows that in many states insurance markets are dominated by only one or two insurance carriers. In at least 21 states, one carrier controls more than half the market. More than half of the market is controlled by two carriers in at least 39 states. In 2007, a survey conducted by the American Medical Association found that in more than 95 percent of insurance markets, a single commercial carrier controlled at least 30 percent of the insurance market.
Fortunately, though, health insurance companies are entirely benign institutions that seek to promote the common good, and would never think of seeking to profit exorbitantly off of the health needs and suffering of the people who support their businesses.

Oh, wait:
Where markets are dominated by only a few firms, health insurers revenues are growing faster than health inflation as insurers maximize rates they charge employers and families and create barriers to care.
Listen, free marketeers: the insight that competition breeds innovation is wonderful - but it is not the end of economic analysis. It seems ridiculous to have to point this out, but it's not the case that efficiency and quality will be maximized for every single conceivable good by leaving it to the whims of the marketplace. National defense is not like that, education is not like that, and in a sane world - or in Europe - it would be manifestly obvious that health care is not like that.

21 comments:

bill in boston said...

i would think the range 44%-70% should be split, and the fact that not state with data had less than 44% duopolist penetration mentioned, in thzdatagraphic presentation.

The Navigator said...

Ah, yes, that's because it's not a free market. I agree with you in your loathing for large corporate insurance companies that gouge consumers. But I disagree with the reasons.

In a truly free market, insurance companies would have to compete with anyone else who wanted to offer insurance. They couldn't just carve out a fiefdom, as the map you shared demonstrated, where they can exercise monopoly pricing.

Consumers should be able to buy insurance from any company in the entire US, if they so desire. We should allow real competition that undermines the monopolies large corporations have, and drives a thriving ecosystem of much smaller, much more responsive companies that actually have to consider their patients instead of lobbying the government to grant them exclusive insurance rights for a certain region.

aj said...

Current government regulations prevents competition and market pricing in the US healthcare industry.

Ascribing the lack of a free market to 'the free market' which you already admitted doesn't exist is tautological and stupid. The effects you see are that of a government subsidized and regulated semi-market.

The Navigator said...

What aj said.

Nikolas said...

Chachy,
I am thinking about exclusively commenting on maps that you post that do not include the District of Columbia. I hope you don't mind. I think its rather absurd for Center for American Progress, which is based in Washington, DC, to not include the nation's capital on their maps. How many health insurance companies do the makers of this map have to choose from? Moreover, this is not an isolated map error, rather many of the maps you post of America omit the District of Columbia. Its like the 550,000+ American citizens don't exist nor do the lines on the map, regardless of scale. As it is now, from my recollection, you have not posted a map of America that has shown Alaska to scale, so why exclude the District of Columbia?

Chachy said...

TN and AJ say: If only it were a truly free market...

Competition in a free market is very good at some things. It's very good, for instance, at providing most consumer goods and services: need a new can opener, or a phone that has the internets on it? Free markets will provide.

But health insurance is not like a typical consumer good or service, because health insurance companies make more money by denying service. If you get sick, it's in the insurance company's interest to cover as few of your costs as possible; and if you have a pre-existing condition, it's in their interest not to offer you coverage in the first place.

And yes, that means that, under ideal free market conditions, another company should be able to come along and provide more comprehensive coverage, and offer it to people who the other companies refuse to insure; but of course, since they're taking on the high-risk cases and offering more coverage, their plans will be much more expensive - it's the only way they'd be able to survive financially. But then unless you're rich you can't afford health insurance, and you're screwed.

This is what I mean when I say that free market fundamentalism is maddeningly facile - it just doesn't apply to every sort of transaction. And that's okay! It won't turn us into Communists if we pool the risks and costs of health care (as we do the costs of national defense, schools, fire fighting departments, roads...). It certainly hasn't destroyed the fabric of society in every other wealthy country in the world.

AJ - That wouldn't be a tautology, it would be a contradiction. But if you're point is that a fully "free market" in health insurance (whatever that might mean; truly free markets only exist in Plato's cave, if they exist at all) would be a better system than the one we have today, I would be skeptical, but open to the possibility that such a system could prove to be a marginal improvement over the current system. But, for the reasons sketched above, I don't believe it could be more than a marginal improvement.

But listen, the argument here, such as it is, is directed at those who say stuff like "the US has the best health care system in the world," and argue that the private sector is inherently better at providing health care than the government could ever be, simply because free markets always work better. Now that's a tautology! (For an example of this sort of free market fundamentalism, see here.)

Chachy said...

Nikolas - Ha! Well, fair point. I can only say in my defense that I go with the maps I find, and when I make them myself, I use the data at hand. So don't shoot the messenger. But it is something I'll look out for in the future.

BIB - Agree; that would only have reinforced their point.

The Navigator said...

Chachy,

What you say is true, but is hardly unique to the health care industry. Every industry has the incentive to provide as little as possible for as much as possible. Certainly, an insurance company shares health insurance's problems.

In fact, I think a healthier model of health insurance would be to focus on catastrophic coverage and cut out the insurance for all the routine expenses. You don't use car insurance to pay for brake replacements or a new paint job. Insurance doesn't even pay if your transmission fails. You rely on car insurance to take care of cases when you injure someone else or when you're in a catastrophic situation.

Also, I don't think it's fair to use this as evidence of "facile free market fundamentalism." After all, you seem to agree that a market with more competition would improve quality of care. And that was my original point: we don't need to wait for Libertopia. We can make simple policy changes, like forcing corporations to compete across state and regional boundaries.

For the record, I think your litany of other areas where we "pool the costs and risks" actually proves my point. I certainly hope you agree that the defense industry is a giant corrupted beast, relying much more on collusion with legislators than real value. You couldn't possibly claim that public schools do a better job of educating than private. Fire departments have been bankrupting cities like Vallejo and San Diego because of their massive pension/salary costs. And I think we should stop subsidizing the auto industry by giving away free roads (in favor of toll roads).

Don't think of it as free market fundamentalism. I consider myself a "help the poor" fundamentalist. The current healthcare system does screw poor people, you're definitely right. I just don't think that they will be better off in a more heavily regulated environment. Let's erase the state lines on that map, erase all the competitive advantages governments grant to large corporations, and promote a healthcare system that actually works, not one that corresponds to a regulatory or free marketeer's vision.

Chachy said...

Every industry has the incentive to provide as little as possible for as much as possible.

But in other industries, improving services will give you a competitive advantage, all else being equal. In the case of health insurance, it is by definition more expensive for the company to provide more service.

Another thing I didn't mention is that the effort to find creative ways to deny coverage to patients leads to a ton of paperwork, middlemen - a giant private-sector bureaucracy, basically - that is one of the main reasons health costs are so much higher in the US than in countries with national health coverage.

In fact, I think a healthier model of health insurance would be to focus on catastrophic coverage and cut out the insurance for all the routine expenses.

And have the government pay for the routine stuff? Then why not have them just pay for everything? Or do you mean people should just pay out-of-pocket for routine expenses? But for lower-income people, the expenses aren't routine at all - even just a check-up can be a significant cost.

After all, you seem to agree that a market with more competition would improve quality of care.

I said I'm open to the possibility that it might marginally improve quality - and that it certainly wouldn't solve the systemic problems. Hardly a full-throated endorsement.

I certainly hope you agree that the defense industry is a giant corrupted beast, relying much more on collusion with legislators than real value.

Yep - we should definitely remove private interests from the equation as much as possible.

You couldn't possibly claim that public schools do a better job of educating than private.

Some public schools are excellent - especially the well-funded ones. Regardless, the answer is not to make all schools private. That would be a disaster for low-income students.

Fire departments have been bankrupting cities like Vallejo and San Diego because of their massive pension/salary costs.

Fire departments did, I think, used to be private. They'd show up at your house and if you could pay, they'd put the fire out for you. If not...

And I think we should stop subsidizing the auto industry by giving away free roads (in favor of toll roads).

I agree! Roads are much too heavily subsidized. Instead we should invest in mass transit, which has all sorts of benefits to society with far fewer negative externalities than the road/highway system we have in place, but which only government is really suited to provide.

The current healthcare system does screw poor people, you're definitely right. I just don't think that they will be better off in a more heavily regulated environment.

Look, here's what it boils down to: every other wealthy country in the world has some form of universal health coverage, and most of them provide better care than the US. This is just an objective fact - costs are lower, coverage is more widespread, and as a result, the populations are healthier, life expectancies are longer, and businesses aren't burdened with our weird system of employer-provided coverage. These are objective facts; either you accept them or you don't. And if you don't, I'm sure I can't say anything to convince you.

The Navigator said...

Several specific points below, but first to address your last point:

There are some things that universal health coverage does well. But there are lots of areas where it fails terribly. The year-long wait for routine surgeries in Canada, the number of people in Britain who have resorted to removing their own aching teeth: these, too, are facts that can't be disputed.

I think we can agree on this: US healthcare is a shitshow and NOT something anyone should be happy about. I prefer an environment where people can experiment with different systems to find the best one. Why not have states let their voters decide and test out things like single-payer systems, more deregulated systems, and everything in between? Laboratories of democracy can be laboratories of health care.

Ultimately, I only care about getting the best healthcare, particularly for the poor. My father's a doc who has spent over half the time in the hospital caring for folks who never contribute a dime and have no insurance (we're in LA and he worked at the County Hospital, so lots of immigrants, illegal and otherwise). He worked in volunteer clinics and helped organize efforts to get care for the poor. My sentiments grow out of those experiences, NOT out of any free market fundamentalism. Just fyi.

Smaller points:

- Def NOT for the govt paying routine medical expenses. Part of the reason routine medical costs are so high because of the disunion between patient and doctor. A direct relationship between the two, and direct compensation, would foster the best care, imho. I come from a family with several generations of doctors.

- I attribute a lot of the increase in healthcare costs to the middlemen, the insurance companies. Cut them out of routine transactions and you're much better off. If the govt can do that, fine, but I doubt it.

- I am FOR private interests. I don't mind if doctors want to make a lot of money, but I DO mind if they have that impulse and there aren't natural restraints on it. In a system that separates doctor and patient, i.e. the doctor is not directly compensated by the patient, the patient loses power, and the doctors has more incentives and opportunities to gouge "the system." I think there are plenty of doctors who happily demand unnecessary tests and don't cut waste, because they aren't taking the cash out of their patient's hand. They are stiffing an insurance company or Medicare. But where do the funds for those entities come from? Us!

As in most transactions middle-men, corporate or government, add all sorts of terrible incentives. One of the great revolutions of the web was making direct retail painless, cutting out the myriad middlemen in a distribution network. I think healthcare reform should focus first on the doctor patient relationship and work its way out. Starting with a massive government system to replace a bloated, bureaucratic corporate system really just doesn't seem like a prudential approach.

Chachy said...

Well, N, I appreciate your humanistic approach, and there's a lot to be said for reform "focus[ing] first on the doctor patient relationship and work[ing] its way out." But I don't think a radically free market approach to health care would have that effect.

Also, I think reform should start from the principle that everyone should have access to affordable health care and it work its way out from that.

The Navigator said...

Fair enough. I guess we really are starting from two different places.

Happily, regardless of where we start, I think we both agree that the map reveals that the way healthcare regional monopolies are created is crap.

Keep up the fascinating maps.

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