Health insurance & antitrust laws/economics [updated]

[Joanne98]

In my prior diary, I discussed the the issues surrounding why a public option in terms of creating a downward pressure on pricing is important.

http://www.mydd.com/story/2009/8/24/12138/8249#commenttop
I mentioned the monopolistic tendencies of the insurance market. Due to the statements of Harry Reid, I want to quickly go into greater detail as to why the insurance market represents market failure in the form of being monopolistic.

Reid states:

"Reid spoke at both venues about the antitrust exemptions health insurance companies have enjoyed for decades as part of the problem with the industry."

http://www.lasvegassun.com/news/2009/aug 28/reids-views-overhaul-taking-shape

This is also being discussed at Daily Kos in the following diary:

http://www.dailykos.com/story/2009/8/28/ 773622/-Harry-Reid-comes-out-in-strong-s upport-of-public-option-(UPDATED-x2,-quotes,-antitrust-explanati on)



The insurance market is monopolistic for two reaons, the laws favor monopolies and the economics of the industry due to high cost of sufficiently pooling risk to produce a viable insurance.

The first reason that insurance companies tend toward monopolies is that they are exempt from federal antitrust laws. Before discussing the law that exempts healthcare insurance, I should begin with a paragraph explaining what antitrust law is meant to address.

The core idea behind antitrust law in an economic sense is to address market failure in which due to a lack of competition a player or a small number of market players can obtain monopoly pricing.

Despite what conservatives now describe as "markets" (which is actually free market fundamentalism rather than capitalism has it had come to be understood), the basic ideas of "markets" is that there should be sufficient number of players such that none can truly affect pricing at equlibrium. Think of this way, there are 20 people all negotiating for the price of Car X with 20 suppliers of Car X. Eventually, the 20 people and 20 suppliers will reach some price that is an average price such that they can sell and buy that car. The version of monopolies that are important here is where there is only one supplier, and, thus, that one supplier will have the power to determine pricing in a way that having competition will not allow. Or, if you prefer, when someone has you over a barrel because theyare the only game in town- you are not going to be able to bargain for a better deal.

In the monopoly (again in layman's terms) of the healthcare industry, many individual geographic locations in the U.S. lack any competition, and therefore, the pricing is solely determined by the insurance company. The basic idea behind this is the law of supply and demand- Everything else being equal, you will buy the cheaper service or product over the more expensive one. But, here you are not given a choice.

That's the cental irony of the Rovian conservative frame about this issue. With the present system, you have no choice, but they pretend as if you do. Healthcare is not only a failure of choice of whether you will actually not consume (since if you need a kidney you are going to have to the surgery and will not shop around for a lung instead). Healthcare is a failure of choice of how you finance getting that kidney. "We got you over a barrel. You need a kidney. We are only game in town that are going to finance that deal. So take what we got to offer or leave it. " Including the risk of them not covering your kidney surgery, the pricing that they charge you regarding the surgery and several of market power tools that are available to monopolies.

Now, as to why, private health insurance in American tends to be monopolistic, as I said, there are two reasons- the law and economic.

The first reason is that health insurance is exempted from the federal antitrust laws. I am not the biggest fan of Wikipedia, but I think this will give you a quick run down of the law shaping antitrust exemption for health insurance companies under McCarran-Ferguson Act:

"McCarran-Ferguson Act, 15 U.S.C. § 1011, is a United States federal law that allows state law to regulate the business of insurance without federal government interference. The McCarran-Ferguson Act was passed by Congress in 1945 after the Supreme Court ruled in U.S. v. South-Eastern Underwriters that insurance could be regulated by the federal government via the Commerce Clause (the overturned case stated that the federal government had this power), or, in other words, that insurance was interstate commerce."

http://en.wikipedia.org/wiki/McCarran-Fe rguson_Act

This is part of the reason you can assume that anyone discussing ending state regulation of private insurance is full of crap. The goal here should be to increase federal regulation so that federal antitrust law applies to health insurance companies in coordination with state laws. There are many reasons for why such a policy change is desireable. One is that we want to coordinate a systemic national policy rather than rely on local governments to overcome the corruption that may occur to the dominance of local insurance companies. Another is that we may want to set policies about pricing that can not easily be addressed at the local level.

The second reason why we see monopolies in the insurance market, and the reason why a change in antitrust law is probably a necessary step to real reform, but insuffient, is that health insurance as a market is naturally monopolistic.

"Natural monopoly occurs when, due to the economies of scale of a particular industry, the maximum efficiency of production and distribution is realized through a single supplier."

http://en.wikipedia.org/wiki/Natural_mon opoly

For the sake of simplicy, I once again use Wikipedia. You may wonder why I say that health insurance is naturally monopolistic? Well, the key to understanding why is to understand how health insurance and insurance in general works. It works through pooling risks, and, in the case of health insurance, it should, but does not, work by reducing costs through how much any individual procedure costs or the cost of medication. There are few competitors tha will have the necessary capital for reserves to make this sort of business work. When there are high barriers to entry, a market may tend toward monopolies. There are other reasons as well, but for now, I will just say that we can not fully address the issue of reform unless we accept the tendency toward a lack of competition.

There is, in a moderate sense (rather than centrist triangulation to the crazy right), a few reasons why government intervention is typically deemed necessary when monopolies arise. One of them was first layed out by Theodore Roosovelt, a Republican who first busted trusts, and thus giving up antitrust laws. One of those reasons is market failure, which monopolies certainly are.

The fact that this is indispute should tell any true moderate versus ape throwing poo conservative how poisoned political discourse is in America. We are discussing essentially regressive practices that have not existed for well over 100 years during the great area of monopolies that nearly destroyed American capitalism in the later part of the 19th Century. Yet, we are seeing the Orwellian way in which these practices are described as the "moderate" view and choice.

I may eventually diary this separately, but here is information that provides a primer on how concentrated the health insurance market is, and why it is example of market failure: http://www.ama-assn.org/ama1/pub/upload/mm/368/compstudy_52006.pdf and http://www.openleft.com/diary/14744/death-panels-vs-the-herfindahlhirschman-index. It is for these reasons that people say that any plan without the public option is not reform. As an industry, health insurance tends toward monopolies. There is nothing else being proposed that will address the underlying reasons for the industrial practices-- everything from recission to pricing should be seen in the light of monopoly abuse of market power.

http://www.mydd.com/story/2009/8/28/152256/551

[merh]

1. I've posted it before, the issue is not "health care reform"

What is needed is insurance reform and regulation of the insurance industry. The federal antitrust laws must be applied to the insurance industry.

We don't need tort reform - we need malpractice insurance reform and we need the AMA to better monitor, regulate and discipline doctors that do not perform and that cannot provide service and care to their patients.

We need health insurance reform and home owners insurance reform so that the insurance companies don't profit while denying care and payments as promised and as paid for - as they contracted to do.

The first bail out of the Bush admin was after Katrina when the federal government bailed out the insurance industries and paid grants to homeowners who were denied their claims by the insurance companies. Most of us were entitled to at least double what we could obtain through grants, the insurance companies denied our claims. Had they paid them when they were due the rebuild would have been less expensive and timely. Now we can hardly afford our insurance - not only did they not pay the claims, they increased our premiums and many refuse to write in the area.

The health care costs are too high but that cannot be corrected by insurance reform. The two issues are separate, tied together but separate.

[Joanne98]

2. You're right. I hope it's in the bill.

[merh]

3. I hope so too.

Unfortunately, egos are getting in the way of legitimate legislation.

Ever since Katrina, blue dog dem Gene Taylor, has been trying to get legislation passed that provides for "all peril" coverage much like the national flood insurance. Part of his legislation includes mandating that the federal antitrust laws apply to the insurance industry. Taylor doesn't like Obama, he didn't support him and doesn't support health care reform.

They both want the same thing, insurance reform. Sadly, they both have failed to recognize what they have in common and how their efforts can mesh and help the American people.