The Senate Finance Committee is circulating the following highlights of the preliminary estimate of the impact of health reform legislation:

"The Congressional Budget Office and the Joint Committee on Taxation just released a preliminary estimate of an amendment in the nature of a substitute to H.R. 4872, the Reconciliation Act of 2010. A link to that letter appears here:

H.R. 4872, Reconciliation Act of 2010

Here are highlights of the letter:

“[E]nacting both pieces of legislation—H.R. 3590 and the reconciliation proposal— would produce a net reduction in federal deficits of $138 billion over the 2010–2019 period . . . .”

“The incremental effect of enacting the reconciliation proposal . . . is an estimated net reduction in federal deficits of $20 billion over the 2010-2019 period over and above the savings from enacting H.R. 3590 by itself . . . .”

“H.R. 3590, as passed by the Senate, would reduce federal budget deficits over the ensuing decade relative to those projected under current law—with a total effect during that decade that is in a broad range between one-quarter percent and one-half percent of gross domestic product . . . .”

“[T]he combined effect of enacting H.R. 3590 and the reconciliation bill would also be to reduce federal budget deficits over the ensuing decade relative to those projected under current law—with a total effect during that decade that is in a broad range around one-half percent of GDP. The incremental effect of enacting the reconciliation bill (over and above the effect of enacting H.R. 3590 by itself) would thus be to further reduce federal budget deficits in that decade, with a total effect that is in a broad range between zero and one-quarter percent of GDP.”

“[I]n view of the projected net savings during the decade following the 10-year budget window, CBO anticipates that the reconciliation proposal would probably continue to reduce budget deficits relative to those under current law in subsequent decades . . . .”

House Energy and Commerce Committee Republicans today criticized Democrats for criticizing health insurers for raising premiums, but then favoring them with special deals as part of health care reform legislation. Here's an excerpt from today's statement:

"Democrats only hate insurance rate hikes that are in the news – After Michigan Blue Cross/Blue Shield proposed a 56 percent rate increase, according to an Obama administration report, Democrats constructing the ObamaCare bill in the Senate rewarded the company with a backroom deal that exempted the insurer from the new tax on all other insurance companies (Section 10905, page 369). "

Is the unprecedented insurance market conslidation in America today part of the problem? I think Sam Stein's reporting on Wall Street's analysis of the phenomenon speaks for itself:

The market concentration for health insurance is so monopolized in some areas that insurance companies are willing to raise prices and lose customers in an effort to improve their bottom line, a leading insurance broker told Wall Street analysts on Wednesday.

In a conference call organized by Goldman Sachs Global Investment Research, Steve Lewis, a highly regarded broker at the world's third largest insurance broker, Willis, painted a picture of the health insurance market in which employers seem likely to be priced out of coverage.

Noting that "price competition" between insurers was "down from a year ago," Lewis relayed that "incumbent carriers seem more willing than ever to walk away from existing business."

...

Insurers are able to do this in part because the markets in which they operate have no adequate competition, suggests Lewis. The broker noted that "the smaller client segment" was "increasingly frustrated" with the renewal of their coverage and was "evaluating potential self-funding with stop loss protection" instead. Lewis added that employers in many markets knew "that they're not going to be able to trade down pricing very significantly" (i.e. find cheaper coverage) and, as such, would likely only change plans or become self-insured if there was a "fairly significant" disruption in service.

"As I mentioned at the outset, it was without a doubt the most challenging renewal cycle in my 20 years of this business with employers really struggling with how and what was going to drive their decision, combined with the lack of aggressive and competitive pricing in the marketplace," Lewis said.

Market concentration encourages insurance companies to deepen their anti-American business model: Increasing their already record-breaking profits by dropping the most expensive of their "customers" from their rolls.

Health reform, with Exchanges for competition, minimum benefit standards, and severe curbs on the industry's benefit design schemes, works to fix this problem. Simply selling insurance across state lines with no regulations - as Republican propose - is a race to the bottom.

What exactly is the problem with health insurers? If it’s profits, then the non-profit blues should be the solution. Yet if it’s size and consolidation, then, as James C. Robinson pointed out in an 2004 Health Affairs article, the non-profits are not only a problem, but in so far as they reduce their reserves to lower premiums, they will be an increasing problem. And if consolidation is the problem, then why is consolidating power in almost every ossified government bureaucracy even contemplated as the solution?

Here’s another question: what’s the alternative? Why is it that private carriers are considered evil when performing administrative services for individuals and the small group market with very little fraud and abuse compared to government programs like Medicare and Medicaid? And it is at least tacitly acknowledged that private insurers provide a valuable service when administering government plans. We hear so much from the left on the efficiency of Medicare, yet in so far as it’s efficient the credit must rest with the private carriers who actually pay out the claims.

The health care endgame debate is so politicized now that it’s all about sticking it to the least sympathetic player--and the one with the least ability to influence voters.

Direct providers are out, as they talk with patients.

• Hospitals and other institutions have to be treated with kid gloves, as they influence doctors, nurses, and patients, who are almost always grateful for the care.

• The drug companies, which often find themselves in the demagogues’ cross hairs, seem to be getting a reprieve. At only 10 percent of the total budget, they can’t possibly be breaking the bank.

Therefore, liberals are naming private insurance carriers as villains based on their survival strategies for remaining in the individual and small group markets. These are the very carriers who will be needed to participate in the state-run exchanges in any new Washington scheme, should the bill pass. But then, they will most likely become regulated public utilities with price controls. At that point, the vitriol will surely turn to the hospitals and doctors.

Consolidation is not the problem. The problem is the very blank check, first dollar insurance coverage with all the mandated extras that President Obama and other liberal Democrats want to impose on all Americans. Even Robinson’s piece slamming consolidation, points out that a major reason for the trend to big is a lack of new, innovative plan designs, that provide new, smaller entrants an ability to compete for market share. Putting a national authority in charge of plan design will only exacerbate this.

Health insurance has been becoming more consolidated in recent years. The advantages of being a national insurer or being large in a particular market have increased over time. Although increased insurer consolidation is bad for physicians, especially those in small practices, which have relatively little leverage with insurers, it is not at all clear that it is bad for those who purchase health insurance—employers, employees and individual consumers.

Recognize that health insurers are intermediaries between providers and purchasers. Purchasers engage insurers not just to pool risks and pay claims, but also to obtain more favorable prices from providers. If insurer consolidation leads to lower prices paid to providers, some or all of the savings could be passed on to purchasers. This is most likely in the large group segment, where there is national competition to serve large companies with employees in various locations. Wall Street analyst reports indicate that this segment of the health insurance market is highly competitive and not very profitable for insurers. So it is likely that most of any provider price reductions achieved by greater consolidation of insurers are passed on to large employers. So increased consolidation of insurers could well benefit large employers and their employees.

The small group and individual segments of the insurance market is less competitive, so this is where it becomes uncertain about whether increased insurer concentration benefits purchasers. The most powerful tool to make sure that increased insurer consolidation does not harm those who purchase in this market is the creation of insurance exchanges. By making it easier for individuals and small employers to compare products offered by insurers in their market, this will make that segment of the insurance market more competitive, which in turn will lead to more of any provider price reductions coming from consolidation being passed on to purchasers.

Bob Berenson and I recently published a study in Health Affairs documenting how leverage of many hospital systems and large medical groups in California has been increasing. Provider consolidation is only one of the factors behind increased provider leverage, others being consumer demands for broad networks, tightening capacity and the regulation of HMOs. Growing provider leverage is a more significant issue for insurance purchasers than increasing insurer consolidation.

Insurance Company Consolidation, Market Competition, and Premium Costs

The American Medical Association recently issued another one of its increasingly predictable, but incomplete, “studies” of insurance market consolidation. Although it does not yet have a monopoly in producing such reports, the AMA appears to have cornered the political market for such one-sided analysis. (This is in contrast to its declining share of the market for physician memberships, which reflects its performance in other political arenas).

Making somewhat more sense of the Herfindahl-Hirschman Index or "HHI" (representing the sum of squared market shares of each opposing firm’s side in a market, if not the square of a rent-seeker’s hypotenuse) and other totems of antitrust lore requires better sorting out of the relevant markets in question. In the case of health insurance, their competitive dynamics differ greatly – depending on whether one is examining the national market for large, self-insured employers (and government bodies); state markets sharing geographic boundaries and little else in common; or local markets subject to state-level regulation. As Chris Conover of Duke University (who did all the important work) and I pointed out in an AEI working paper earlier this year, the health insurance market generally is highly competitive for the roughly 60 percent of privately insured Americans who now purchase their coverage through large groups. The majority of large employers have ample alternatives to buying fully insured health benefits, such as self-funding or self-administration. Private insurers selling administrative services only or more limited levels of risk management in this national market report quite modest profitability levels, and concentration in the multistate employer market for health benefits remains low.

When it comes to the market for fully insured health benefits, individual states generally are too large to constitute a meaningful basis for antitrust analysis. In any case, states with nominally concentrated insurance markets tend to be dominated by a nonprofit insurer, and they do not consistently produce significant adverse consequences.

High HHI concentration levels alone do not demonstrate that market power exists or is being exercised. Metropolitan-Statistical-Area-level concentration ratios of the sort calculated periodically by the AMA are used by antitrust regulators only as a screening tool to identify where excess market power might be a problem. A high ratio itself is only the starting point for a careful investigation of whether in fact a firm or even an entire industry wields excess market, including whether it attained such market power illegally. Even in “concentrated” markets, the credible threat of entry by other plans can produce "competitive" market conditions, including lower prices, increased quantity, and more efficient administrative cost structures.

The available evidence is inconsistent with the view that concentration is allowing health insurers to exploit their members. Instead, it squares with a more plausible view that concentration in the health insurance industry has provided a useful corrective to the equally (or more) disturbing growth in concentration of many hospital and physician markets over the past decade. Absent countervailing power from insurers, patients might be just as vulnerable to exploitation by providers as they purportedly are to profit-motivated insurers. Greater insurer bargaining power results in lower hospital prices, and health insurer concentration is associated with reductions in physician earnings (hence, AMA’s interest in this issue). But this suggests that increasing insurer competition while leaving in place concentrated markets for hospitals or doctors may well make patients worse off rather than better. Conversely, only in markets already lacking provider concentration will a singular focus on enhancing competition among insurers be certain to improve matters.

Notwithstanding rhetoric from policymakers claiming health insurers are "making record profits, right now" or that such profits are obscene, annual figures over nearly two decades (1990-2008) show that net income as a percent of revenues for publicly traded hospital and medical service plans averaged only 3.3 percent, ranging from a low of just under 0 percent in 2002 to a high slightly above 6 percent in 1994.

Recent figures show that the total margin (net income as a percent of revenues) for nonprofit Blues plans declined from 4.3 percent in 2007 to 2 percent in 2008. But this includes income from investment revenues. Underwriting margins, which are calculated based only on premium income, were only 1.0 percent and 1.4 percent respectively during these years. This is consistent with historical data (1997-2001) showing that total margins for nonprofit Blue plans were 1-2 percentage points lower than those reported by for-profit Blue plans, with more than half this difference stemming from lower underwriting margins.

In any case, to the extent that lack of competition in health insurance is a problem, it is most keenly felt in the markets for nongroup and small group coverage. One notable, and more scholarly, study within the last year by Northwestern University economist Leemore Dafny and several coauthors did document that most local markets are becoming concentrated over time. Applying their result to the observed increase in concentration from 1998 to 2006, the authors estimated that private health insurance premiums nationwide were 2.1 percent higher in 2006 than they would have been had concentration remained unchanged.

Let’s pause for some perspective. Given that inflation-adjusted premiums doubled during this period, these findings imply that consolidation accounts for very little of the steep increase in health insurance premiums in recent years. Indeed, the authors further concede that their results, based on a private national database of more than 800 employers (mostly large, multistate, publicly-traded firms) cannot necessarily be extrapolated to other markets such as those for small group or nongroup insurance, and they caution further that this finding is based on a single merger.

Ironically, the small group market in particular is one where state regulatory oversight of market conduct already is (or could be) most intense, yet there is some evidence that state (and federal) regulation of that very market has in some cases reduced the number of insurers or increased concentration in that market. The real issue is one of better, but not necessarily just more, regulation. For example, actions that have aroused the greatest public concern, such as having coverage cancelled (rescinded) when insured individuals get sick or refusals by insurers to authorize covered benefits, already are illegal. This suggests that better enforcement of existing laws, rather than enactment of new ones, may be warranted. Likewise, the general public might benefit from being made more aware of its options for appealing disputes about medical necessity, experimental or investigative treatment, emergency room reimbursement, or similar matters. Public distrust of insurers might well be placed in perspective if regulators did a better job of demonstrating how infrequently complaints are filed against health insurers relative to the huge number of claims processed or members served.

What else can we do differently -- besides assuming, with little evidence, that antitrust enforcement will track closer to its idealized theory than to its long track record of inconsistent, if not dismal, performance? We might consider highlighting the extent to which some problems of market concentration originated in state policies (e.g., tax exemptions and regulatory advantages for “nonprofit insurers”) that favored certain types of plans rather than through natural market forces. Although broad tax-exempt status was curtailed in recent decades at the federal level, it remains to varying degrees in some states. In some cases, it extends not only to state income taxes, but also to other business taxes, sales and use taxes, and real and personal property taxes; even if a state does not extend full tax exemption, Blue plans often have lower requirements for premium taxes, guaranty fund assessments, and high-risk pool assessments relative to for-profit health insurers. If having a nonprofit Blue plan dominate a market is thought to be problematic, the most straightforward solution to this problem may be to revisit whether tax exemptions or similar privileges are warranted.

In areas where lack of competition adversely affects those seeking to purchase health insurance, policymakers should consider another, more effective, tool to restore competition that would be superior to reliance on a public plan. For at least two decades, the most important source of competitive pressure in health insurance has been the availability of new entrants, including start-up HMOs and carriers from adjacent geographic regions. But because the McCarran-Ferguson Act delegated authority to regulate insurance to the states more than six decades ago and insisted that such regulation be quite comprehensive to merit preemption of federal oversight, insurance companies wanting to sell products across state lines must comply with a myriad of different state regulations, including mandated benefits, premium taxes, solvency requirements, and licensing rules. Those regulations often help entrench dominant incumbent carriers, discourage new entrants, and prop up an inefficient mix of hidden cross-subsidies. Collectively, such state regulations are estimated to increase premiums by 10 to 96 percent (probably much closer to the former figure than the latter one). Those costs are in addition to the widespread geographic variations in health spending that are related to differences in practice patterns. Together, these result in a nearly five-fold difference in average premiums across states. Removing regulatory barriers to cross-border sales thus offers the prospect of increasing competition and reducing regulatory costs.

There are a variety of approaches to allow cross-border sales while retaining accountable regulatory authority at the state level. The better ones provide suitable safeguards to ensure states handle such regulation even-handedly and responsibly, albeit with a somewhat lower level of net savings on premiums, and do not promise more than interstate competition alone can deliver.

A recent analysis by Cory Capps, PhD, a former staff economist at the Antitrust Division of the Department of Justice, found that the data used by the AMA on health plan concentration “are plagued by a number of significant limitations” and “fail basic checks of accuracy and reliability.” For example, the AMA data exclude some types of self-funded plans, a large and growing portion of the market, and show significantly higher market concentration than data available from the National Association of Insurance Commissioners.

In every state, families and employers have multiple choices of both insurance plans and types of coverage. The states that are often cited as examples of high market concentration actually have some of the lowest health care costs in the nation. To the extent that research has raised the question of inadequate competition as a factor in rising health care costs, it has pointed to consolidation among providers, not health plans.

According to the Boston Globe, a recent report by the Massachusetts Attorney General “points to the market clout of the best-paid providers as a main driver of the state’s spiraling health care costs” and “found no evidence that the higher pay was a reward for better quality work or for treating sicker patients”. In a new report in Health Affairs, Paul Ginsburg and Robert Berenson wrote that "providers' growing market power to negotiate higher payment rates from private insurers is the 'elephant in the room' that is rarely mentioned."

Health care costs are rising at an unsustainable rate, making it difficult for families and employers to maintain their health care coverage. New data recently released by the federal government cited rising prices for hospital and physician services as a key driver of these cost increases. Unless there is a greater focus on the skyrocketing cost of medical care, health care reform will not achieve the goals of making coverage more affordable and putting our health care system on a sustainable path.

The health insurance industry has changed significantly due to a wave of unrestricted mergers among large companies, steadily eroding insurer competition. Between 1996 and 2008, there were more than 500 mergers involving managed care insurers, but federal antitrust regulators challenged only three.

Dominant market power garnered by health insurers through rapid, large-scale consolidation has not helped patients. Despite insurers’ promises that bigger would be better and cheaper, premiums for family coverage have soared 131 percent in ten years in this increasingly consolidated market, far outpacing the increases in the actual cost of health care. Health plan executives and shareholders, on the other hand, are reaping enormous profits. Recent reports show the profits of the major national health insurers have increased 250 percent between 2000 and 2009, ten times faster than inflation.

Studies are mixed on how premiums would be impacted if laws were changed to allow health insurance policies to be sold across state lines. Much depends on how the legislation is structured. For younger, healthy individuals, premiums may decrease, since policies could be purchased from insurers who do not have to comply with state patient protections and benefit mandates. As more healthy people buy less comprehensive policies from insurers in less regulated states, an imbalance is likely to occur in the risk pool that would drive-up premiums for people who are sicker or require greater coverage. There is also a concern that a change in the law will encourage greater market consolidation since smaller regional or local insurers might not be able to compete with large out-of-state insurers.

Textbooks of microeconomics present as an ideal economic arrangement a perfectly price-competitive market that meets the following conditions: (1) There are so many buyers and so many sellers that not one of them has enough market power to sway prices one way or the other. (2) All participants in the market are fully and properly informed about the price and quality of the things being traded. (3) The sellers bear the full cost producing the things being traded and the buyers the full prices being charged for them. (4) It is easy and relatively costless for buyers and for sellers to enter and exit this market.

Such a market can be shown to have a number of properties that economists consider desirable, among them that prices charged will be as low as they can be.

Now, the providers of health care are the sellers in the market for health care covered by health insurers. But who are the buyers? Are they it the insured patients? Or are they the insurers paying on behalf of patients, when insurers for the most part do not know until long after the fact that a good or service was being delivered to an insured patient, let alone whether giving that good or service actually was a medically necessary component of the treatment response to a given medical condition whose diagnosis itself often is beset by uncertainty.

In short, readers might ask themselves whether the market for insured health care can ever come close to the ideal of a price-competitive market.

For one, what actually are the "things" being traded in this market for which prices must be determined? Are they entire "medical treatments" for given conditions? Or are they one of the many of items that can go into a particular treatment for a particular medical condition, which to a considerable extent is at the discretion of the physician?

In my view, we are dreaming if we believe that this market will ever be perfect.

We could, however, improve it over the current state of affairs by making only bundled payments for entire medical treatments and using health information technology vigorously to disseminate information on the level of these bundled payments charged and the quality of the treatment – as is now widely being proposed. That is the hope. Realizing that dream, however, probably is the better part of a decade or more into the future.

In the meantime, it is fascinating to listen to the wailing over this market emanating from both insurers and physicians.

Insurers complain, often with justification, that the hospital market now is so consolidated that hospitals can dictate prices to them. For their part, physicians complain that insurers are now so concentrated in their market area that insurers can impose prices on physicians on a take-it-or-leave it basis. What physicians do not mention, of course, is that they still have overwhelming professional power to dictate the volume of services that insurers must pay for, some gingerly utilization controls by insurers notwithstanding.

It is not clear to me how one should remedy this market in the short run, as long as fee-for-service remains so prominent in it, along with so much physician discretion over volume.

If the insurance side of the market were fragmented into more and smaller insurance companies active in a given market area, they would be even weaker vis a vis the consolidated hospital systems and become ever more mere conduits of whatever prices hospitals can dictate to insurers.

On the other hand, if the insurance side were more consolidated to present better countervailing market power to the hospital sector, it would be even more able to dictate prices to physicians. Under fee for service, however, physicians could still respond by expanding the volume of services they recommend to their patients.

Some commentators will argue that the whole issue could be sidestepped if insurance were substantially pushed out of this picture through very high deductibles and coinsurance and patients became the countervailing power vis a vis physicians and hospitals. I will let these analysts make that case themselves aside from mentioning that even in such a world a large fraction of the total volume of health care being rendered to patients would remain be covered by catastrophic health insurance.