David R. Henderson  

Pseudo-Competition

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The congressional leadership has been very vocal lately about the need for competition in health insurance. These are people who have previously never had a good word to say about "competition" in their entire political careers. They are the very same people who have previously resisted (and even ridiculed) proposals to allow health insurers to compete across state lines.
They hate the idea of private Medicare Advantage plans competing with Medicare. They tolerate (but dislike) the "privatization" of Medicaid. They steadfastly resist using S-CHIP or Medicaid funds to pay employer-provided insurance premiums. But they are born-again free enterprisers when it comes to the newly envisioned "health insurance exchange."

This is from health economist John Goodman, a long-time advocate of actual competition.

He comes up with the following theorem:

When health plans are not allowed to compete on price, they will not compete (in a positive way) in any other dimension either.

The whole thing is worth reading. As a bonus, Goodman often, as he does in this case, links to songs from the 1970s. This is one is from the Bee Gees.


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COMMENTS (6 to date)
John Thacker writes:

"When health plans are not allowed to compete on price, they will not compete (in a positive way) in any other dimension either."

I agree with most of what he says, but I’m unsure of this. I think of the airlines before deregulation. They were not allowed to compete on price, but they did compete on amenities. Certainly, it resulted in amenities favored by the wealthy, their only clientele with the high regulated prices, but I do think that they competed in a way that the wealthy view as positive and would like airlines to return to. (It has become obvious that the marginal consumer, voting with her dollars, prefers the lowest possible ticket price for most airline travel over paying more for amenities.)

Health care would be quite different, as they would be forced to serve everyone.

Nick writes:

I agree with Mr. Thacker, of course competition would exist, the companies continue to want growth, don't they?

Eric H writes:

John Thacker--

I think you've confused a few things in your example. Under regulation, the airlines couldn't attract marginal consumers by lowering price, so they piled on amenities normally not offered with such a low ticket price. This meant that less wealthy people could enjoy things like fancy meals and wines that were previously only available to the rich. Such amenities are now offered only with premium ticket prices--the people who really want them--and can afford to pay for them--can have them.

Ticket price ceilings kept airlines from accurately tailoring amenity levels to demand--in other words, they kept airlines from efficiently allocating resources. The airlines threw a steak at whoever wanted one and hoped it would stick, when given the law of demand, all people really wanted was a cheap ticket.

Goodman's point is that health insurance providers will do the same if allowed to cater to the full spectrum of demand for health care. And such a spectrum does exist. Witness the success of clinics in Walgreens and malls that offer entry level care and routine diagnosis and vaccinations, as well as the proliferation of physician's assistants that provide specific types of care that don't require 12-16 years of medical school and residency.

R. Richard Schweitzer writes:

Regretably all this has nothing to do with the real nature of what is going on politically.

However, insurers, for the main part, have been diverted (perverted?) from the function of spreaders of risks, to administrators of benefits and mechanisms for shifting and spreading costs.

R. Richard Schweitzer

Deanna writes:

I agree that competition is necessary in order to push health care providers to provide the best services that they are able to. Competition has more often than not driven the market in the direction of better service and lower prices.

Private health care is the most beneficial to its recipients in my opinion, because the individual can receive the service and care that they need, instead of settling with the minimum that they would be given in a universal health care system. With this kind of system, people would only be paying for what they want and need, not what they are told they should have and what everyone else needs as well.

Views on health care are changing over a broad spectrum and I hope that the best policies will be chosen from a logical and economic standpoint.

roo writes:

If such reforms as this exchange are enacted the term 'insurers' ought to be chucked in favor of something that actually describes the price-controlled/controlling entities that will result.

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