The Public Option and State-Level Competition

This week, the Senate is taking up the controversial issue of whether health reform should include a public option -- that is, a government-run health insurance plan.

But there's also an important state-level issue. Analysts at liberal interest groups such as Health Care for America Now! say that one of the reason we need a public option is to break the near monopolies health insurers have on markets in certain states.*

That sounds plausible. After all, greater competition always reduces prices, right?

Not necessarily, says USC/Rand economist Dana Goldman. Health insurance markets, Goldman points out, are different. "When you are the predominant insurer, you can hammer the providers on price," says Goldman, whereas "if you have a fractionated market, the doctors can tell you to buzz off."

So insurers that dominate their states' health insurance markets might earn more but make up for it by demanding lower prices from providers.

Does that actually happen? To find out, I crunched the numbers, using data from the American Medical Association's 2007 report "Competition in the Health Insurance" and a 2009 report from Health Care for America Now! titled "Premiums Soaring in Consolidated Health Insurance Markets."

What I found was surprising: In fact, concentrated health insurance markets don't seem to be associated with higher rates of premium increases. *

On the contrary, market concentration is actually associated with lower premium increases. That suggests that the need to inject more competition into state-level markets may -- one of the major rationale's for the public plan -- may not be as urgent as many on the left seem to believe.

Here's a list of the ten most concentrated health insurance markets, along with the share of the market controlled in 2007 by the state's top health insurance provider.

1. Hawai--i 78 percent (Blue Cross Blue Shield HI)

2. Rhode Island -- 79 percent (Blue Cross Blue Shield RI)

3. Alaska -- 60 percent (Premera Blue Cross)

4. Vermont -- 77 percent (Blue Cross Blue Shield VT)

5. Alabama -- 83 percent (Blue Cross Blue Shield AL)

6. Maine -- 78 percent (WellPoint)

7. Montana -- 75 percent ( Blue Cross Blue Shield MT)

8. Wyoming -- 70 percent (Blue Cross Blue Shield WY)

9. Arkansas -- 75 percent (Blue Cross Blue Shield)

10. Iowa -- 71 percent (Wellmark)

Source: AMA "Competition in Health Insurance," 2007 and HCFN!