The term "market share" is more properly termed "available market share". I am excluding from the overall market share, individuals that derive their health care benefits from government health care programs such as Medicare and Medicaid and do not elect a "private market" Medicare plan.
Government programs often account for more than 50% of the market especially in rural or 'inner city' markets. Therefore, the health insurance companies are not competing for the whole market but rather the available market.
However, within this context, market share is extremely important. It allows insurance companies to secure discounts from community health care providers. These discounts provide large market share insurance companies a significant cost advantage against their smaller competitors. Similarly, these rates are often a fraction of what individuals pay for the same service if they do not have access to these discounts.
Therefore, once two or three companies secure enough market share to enjoy this cost advantage, they virtually "own" the available health care insurance market. As a result, beginning in the "eighties", a saying emerged that in health care insurance it was better to be a "mile deep in local markets than 6 inches deep across the country".
This explains why throughout most of the country, the health insurance market has evolved into markets where no more than three insurance companies effectively compete for the market as a whole.
In some markets, where underwriting and pre-existing condition exclusions are allowed, small insurance companies focused at the individual and small employer market can still thrive. But they are niche players focused at insuring people that are unlikely to need routine health insurance.
Republican proposals to allow health insurance companies to "sell" across state lines will not work, since the current situation evolved because large market share companies effectively "out compete" out of market companies due to their provider discounts. Allowing them to compete, where they can't compete does not solve anything.
Democratic proposals to create a "new entity" will not be any more competitive and will result in the government statutorily dictating pricing. This converts the pricing mechanism in the market from an economic process to a political process. In the end pricing will be dictated by contributions to politicians instead of market forces.
So a better alternative is to compensate insurance companies to seek out discounts in the market, but to share those discounts with everyone. To achieve this goal, I recommend that the government through regulation require all providers to post their rates on the internet and to file their contracted rates with their state insurance commissions. These filings would be made available to the public.
Posted provider rates cannot be more than 10% higher than the blended rate of private market insurance entities comprising 50% of the available local market or 25% higher than Medicare reimbursement rates, whichever offers the consumer a better rate.
Providing the dominant market share health insurance companies up to a 10% pricing advantage compensates them for negotiating discounts on behalf of the community as a whole and provides them incentives to secure better rates that benefits everyone in the market.
Likewise, it provides for a fair negotiation between providers and consumers. A individual consumer being rushed to the emergency room is not in a position to negotiate rates. In contrast, insurance companies have the information and time to negotiate "arms length" pricing, provided competition at the provider level exists.
However, in some markets there is very little provider competition. There are a variety of reasons for the limited provider competition. In some markets, statutory limitations exist in the form of CONs. CONs (Certificates of Need) are used by states to control the number of providers. This article is not intended to debate the costs and benefits of CONs, but rather to note they exist and they limit competition.
Consolidation of provider services has resulted in a similar "own the market" condition that health insurance companies enjoy in many markets. As a result, health care providers dictate pricing to the health insurance companies. "Access" provisions in their contracts with employers force health insurance companies to contract with these "health care" providers without leverage.
In rural markets, "natural" monopolies occur due to the fact that the market is unable to support multiple providers within the same discipline.
For all these reasons, a second pricing mechanism is necessary, hence my provision that consumers and insurance companies can always default to pay Medicare rates plus 25%. This provides a burden on Medicare to determine a fair rate for providers in these communities and limits the ability of government to "cost shift" to private payers without totally eliminating their ability to do so. Ideally, Medicare will use information derived from competitive markets and information derived from "cost reports" to determine fair pricing in these markets.
With this change, I expect competition to health insurance companies to come from two sources. Smaller market share insurance companies can compete for a greater segment of the population and insurance companies outside the market can enter the market and have a chance to compete.
More importantly, health insurance companies will experience greater competition from their customers. Many individuals will opt to self insure using Medical savings accounts in combination with catastrophic health insurance policies, since they have access to competitive pricing for health care services. As a result, large health insurers will need to offer more benefits and tighter insurance pricing to retain their customers.
In effect, this suggestion is one step towards introducing the benefits of competition into the health care system.
Through this blog, I hope to introduce readers to my ideas based on over 30 years in the insurance and health care industry on how we as a country should approach reforming our health care system. Thank you for spending your time reading this blog, I hope you found it interesting and thought provoking.