Is concentrated power a good or bad thing when it comes to health care plans?

December 14, 2009

During the debate about health care reform, there has been much discussion about the need for a public option. The advocates for that option talk about the need to assure real competition in health care. About the public option, Robert Reich said, “…without a public option, the other parties that comprise America’s non-system of health care — private insurers, doctors, hospitals, drug companies, and medical suppliers — have little or no incentive to supply high-quality care at a lower cost than they do now.” Other advocates have made similar statements about why a public option is a necessary component of health care reform. But, is this a true statement? How important is the public option to achieving an environment that is conducive to improving the cost effectiveness and quality of health care?

I contend that the public option is one mechanism that can help achieve improvements in cost and quality but it is only one — and by no means a proven strategy to achieving these ends. In the debate about the public option, there seems to be an underlying “given” that concentrating power in a limited number of health plans in a region is a bad thing. But again, there is no data to support that conclusion. In fact, there is data to support the opposite conclusion. Medicare and Medicaid have most of the market for the populations they cover (approximately 78 percent of the Medicare population remains enrolled in Medicare traditional rather than in a privately run Medicare Advantage products; state Medicaid programs remain the predominant policy making entity covering the categorically eligible poor – even if they deliver services through private contractors). And, these programs have shown that they consistently offer their services at lower cost than many private health plans. The advocates for a public plan say that that shows that government is the more cost effective alternative. But the fact that Medicare and Medicaid have delivered services more cost effectively doesn’t necessarily mean that that is because they are government entities. Something else could be going on in this regard. In fact, the real issue may be not that the programs are run by a government entity but rather that these programs have enough concentrated market share that they have considerable leverage when it comes to negotiating with providers of care.

A picture of the leverage argument can be seen by looking at data for the state of Michigan. Blue Cross and Blue Shield of Michigan covers just about half of the state’s population or approximately 70 percent of the state’s private market. Data for Michigan shows that for more than 20 years, the rates of increase in state health care costs has been less than the national average and per capita health care spending in the state is ranked 36th in the country (CHRT Issue Brief “Health Care Spending by Country, State and Payer”). The fact that Michigan health care trends have been lower than the U.S. overall and that there is a predominant health plan in the state is not necessarily a constant conjunction. However, there is little question that BCBSM enjoys negotiating leverage that is not matched by other, smaller health plans. And, that negotiating leverage has certainly produced cost competitive benefits to the purchasers in the state of Michigan. Does that mean that there is no need for competition in health care? BCBSM still enjoys healthy competition in the state despite its predominant market share. And, it is likely that competition does have value in encouraging health plans to look for innovation. However, pressure for innovation and competition can come in many forms. One of the most powerful is the pressure to contain costs that is exerted by purchasers of health benefits.

My guess is that whether or not there is a public option in health reform is largely going to be irrelevant to creating the kind of market pressure that would produce innovation (witness the value ascribed to the public option in the House bill by the CBO!). Rather, the biggest force for change is one that is sorely underestimated in most of the commentary about the health care reform bills being considered in Congress right now: the insurance exchange. Done right, the insurance exchange will have the kind of market power and will exercise the kind of leverage over private carriers to create a mandate for cost effectiveness and quality enhancement. It is that new entrant into the health care mix that will be most interesting to watch over time. How it affects the market will be an exciting part of the new “health reformed” world.