Is health insurance competition good for consumers?
Relative strength and outside options are key decision makers when it comes to negotiation. In a study posted on the London School of Economics Business Review, two researchers examined the effect of competition in health insurance on hospital prices and premiums. In the study it was found that “when an insurance plan is removed (which we interpret as reducing insurer competition), premiums are likely to rise by as much as 10 percent, consistent with standard intuition…” This is a very logical outcome if we examine this “game” through the relative strength of the players as we have in class. As a consumer has fewer and fewer insurance companies to choose from, his position on the graph becomes weaker and his outside options are reduced.
The other interesting finding of the paper is that when the insurance company drops out, it can either raise or lower the price charged by hospitals. If the remaining insurance company is large enough it can force the lowering of hospital prices due to its increased power position, however the opposite is true if the remaining insurance companies are small and fractured. The conclusion that the article makes is the lowered insurance competition could actually lead to a reduction in hospital prices and that true competition may be less desirable.
However, as shown in the image above, fewer insurers weakens the customers position and leads to a higher healthcare cost. What is happening here? As shown below, as the number of insurers decreases the companies begin to act like a central node in a three node bargaining graph. The company is able to negotiate a low cost of health services from the hospitals but at the same time negotiate a high premium with its customers due to the insurance company’s relative strength over the other nodes. If this is the case, the answer to the question of how competitive the insurance market should be is a nuanced answer, as stated in the article. Too little competitiveness would give insurance company too much strength and bargaining power, while too much competitiveness could give hospitals more bargaining power causing them to raise their prices.
Source: http://blogs.lse.ac.uk/businessreview/2015/10/05/is-health-insurance-competition-good-for-consumers/