What is competition?


A reader commented that market share statistics do not reflect whether competition occurs in a health insurance market. To stress a point he stated competition occurs when companies >1, and many states have competition of >2 major players, which makes for a more competitive market than a monopoly allows.

Competition to me means that at the least there is/are ‘forces’ in the market that somehow impact prices and quality of product or service, and in common usage implies lowering prices overall with some attention to quality. Many of us have cars in mind as a mental picture, and electronics.

Health Care for America Now has put together information compiled by the American Medical Association on market share enjoyed by insurers by state, and on the DOJ interest in the increasing concentration of ownership, again using AMA figures going from 33% highly concentrated in year 2000 to 51% in year 2007 as median % of market share nationally (Blue Cross/Blue Shield mainly). The trend for increasing consolidation within each state is clear.

The Department of Justice disagrees that anything less than a monopoly makes for effective competition in the health insurance market, as does economic theory in the form of an Herfindahl index. In fact, since 1982 anti trust law has used this measure along with a concentration ratio of an industry as an indicator of the relative size of firms in relation to the industry as a whole in evaluating ‘competition’.

DOJ states that in the state-based system of health insurance currently practiced:

If one company holds more than a 42 percent share of a market the U.S. Justice Department would consider that market “highly concentrated.” This means that an insurer, with impunity, could raise premiums and/or reduce the variety of plans or quality of services offered to customers.7

(7. US Department of Justice, “The Herfindahl-Hirschman Index.” Accessed here; American Hospital Association, “The Case for Reinvigorating Antitrust Enforcement for Health Plan Mergers and Anticompetitive Conduct to Protect Consumers and Providers and Support Meaningful Reform,” May 11, 2009. Accessed here.
This report makes use of data published by the American Medical Association (AMA), which is not a member of the Health Care for America Now coalition. The AMA did not collaborate with HCAN on this report.)

Without necessarily getting into health insurance competition only, since the competition meme is invoked often in many places, what are market rules that demonstrate whether competition is working or not?

Several thoughts occur, to fit the meme:

1. Competition is defined as the way to lower prices and better product by many. Does this occur naturally, freely, when two companies share 75% of a market? Or if one company has 50% market share, with more players (as in MA)?

2. When prices double for a product in 8 years, how is competition working to control costs? How is this claim for competition proved?

I have in mind a different post on market share for health insurance companies, and the nature of health care for another. This could be a post to come to terms with readers notions of competition.

Chart below the fold.