Must-Read: Richard Scheffler and Sherry Glied: States Can Contain Health Care Costs. Here’s How

Must-Read: Perhaps even very large health-insurance entities can be made to behave competitively if their regulator is clever enough…

Richard Scheffler and Sherry Glied: States Can Contain Health Care Costs. Here’s How: “THE architects of the Affordable Care Act counted on competition in the health insurance market to keep costs down and quality high…

…[But] its vision of a more competitive insurance market seems to be fading. The nation’s second-largest health insurer, Anthem, is poised to acquire Cigna, the fourth-largest. Aetna, the third-largest insurer, is seeking to acquire Humana, the fifth-largest. If approved by the Justice Department, these mergers would produce companies controlling about 35 percent of the health insurance market. These mergers would likely leave that market with far fewer competitors….

Our research suggests that this apparent failure obscures a potential path to success, one that lies between competition and a fully regulated market…. States could, for instance, either accept all insurers who seek to participate or select a limited number to sell coverage. New York chose the first course, permitting all willing insurers to join; California chose the second, selecting 12 of the 32 insurers that initially showed interest. This choice was critical because Covered California, the state’s marketplace, used its leverage in selecting plans to keep initial premiums low…. New York, by contrast, permitted insurers to offer not just standard plans, but also alternative plans with different cost-sharing and benefit designs.

When we examined the two states, we found that the effect of insurer competition differed greatly. In both states, areas with more hospitals had lower premiums compared with areas with fewer hospitals. But in New York, areas with fewer insurers had higher premiums, suggesting that insurers kept the benefits of greater bargaining power for themselves. In California, by contrast, areas with fewer insurers also had lower premiums. Why? With initial premiums set at modest but adequate levels, and a vibrant marketplace, there was no need to further threaten insurers who might consider large premium increases. If an insurer tried to raise its premiums too far, consumers could easily shop….

Over time, we will learn more about how these alternative designs work. But one point is already clear: The choice between regulation and competition is a false one. To best manage our health care system, we will need both.

June 21, 2016

Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch