John Lott Fact-Checks President Obama, Part I

Just how competitive is the health insurance marketplace? A 2008 study by the American Medical Association shows that one or two health insurance providers dominate the market in most states. The NCPA has also produced a study of health insurance concentration. Here is President Obama on the same issue:

Consumers do better when there is choice and competition. Unfortunately, in 34 states, 75% of the insurance market is controlled by five or fewer companies. In Alabama, almost 90% is controlled by just one company. Without competition, the price of insurance goes up and the quality goes down.

Yet about 55 percent of employees get insurance through a self-insured employer and these employers hire “third-party administrators” to manage their plans. There are about 900 of them and they compete in a national marketplace.

Here is John Lott:

Take Maine, Senator Snowe’s state, as an example. There, the two largest insurance companies appear to control 88 percent of the market. And Well Point Inc., a non-profit, makes up most of that, with 78 percent. But…slightly over half of the privately insured in Maine (52.1 percent) get their insurance through their employers who “self-insure.”… Well Point Inc. thus really provides primary or “full” insurance to 78 percent of the market not covered by self-insurers. Doing the math gives 78 percent x (1 – 52.1%) = 37.1 percent of the total market in Maine…

For Alabama, instead of the “almost 90% is controlled by just one company,” as the president claims, the correct number is 36 percent. The second largest company has just 2.1 percent of the market.

Even so, these markets could become more competitive with one simple change. Why not give individuals and small businesses the right to buy in a national marketplace, just like large employers? Then the problem of concentration would go away.

Comments (6)

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  1. RJ Moeller says:

    Hey I found your blog today linked from Human Events. I really like what I see. I’ll be sure to regularly stop in.

    I am a 26 year old grad student from Chicago and I have a humble little blog of my own (A Voice in the Wilderness).

    Keep up the good work. Thanks and God bless!

  2. Linda Gorman says:

    Plus there’s the economic literature which indicates that market competitiveness is not necessarily related to the number of companies in it, particularly in markets with large economies to scale.

    In short, a market with only a few competitors can be extremely competitive. Cellular service, airlines, and aircraft are cases in point. Markets can even be competitive even if there is only one company in it provided the company has limited power to price its products and has to live in fear of attracting new entrants.

  3. Bart Ingles says:

    And at best, it remains to be seen whether a so-called public option would increase or decrease competition.

  4. Tom H. says:

    The best idea is to let purchasing occur across state lines — giving individuals and small businesses the same opportunities all the large companies have today.

  5. Larry C. says:

    I agree with Tom.

  6. Alan Reynolds says:

    This “market concentration” dogma was debunked by Harold Demsetz in 1973 and by Yale Brozen in an 1982 book. In competitive markets firms that do the best job at providing what consumers want at the best price will often attract a large market share. Consumer Reports ranks Alabama’s nonprofit BCBS plan as the best PPO in the nation, which explains why they have 69% of a state market with 39 carriers(the President used an old figure for the small group market only). Alabama is also the least regulated state, in terms of costly mandates.