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1

A Brief History of the Private Health Insurance Industry

• Private health insurance industry today– Funds 35% of all health care expenditures– Provides coverage: over two-thirds of population– Very pluralistic– Many different types of health plan providers

• Health maintenance organizations,• Preferred provider organizations, self-insurers, • Third-party administrators, • Traditional insurers with and without utilization review

– For profit and not-for-profit entities

(c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

2

Number, Types, and Size Distribution of Health Insurers

• Private health insurance– Many different health insurers,

• Commercial carriers, • Blue Cross/Blue Shield (BCBS) plans, • HMOs, • Other types of managed care plans

(c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

3

Number, Types, and Size Distribution of Health Insurers

• Practices of private health insurers– Offers its subscribers a choice among

traditional plans and various types of managed-care plans.

– May specialize in either group or individual health insurance, or may choose to offer both.

– Often are licensed to underwrite and sell health insurance in more than one state.

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4

Number, Types, and Size Distribution of Health Insurers

• How to measure concentration / distribution?– Herfindahl-Hirshman Index (HHI)

(Herfindahl score)

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5

Number, Types, and Size Distribution of Health Insurers

• Private health insurers– National level: relatively large number – State level: a few large sellers

• Robinson (2004)– HHI > 1,000 in all but 3 states– HHI > 1,800 in all but 14 states

• Highly concentrated

– Metropolitan statistical area (MSA)• American Medical Association (AMA)

– HHI > 1,800 in 96 percent of the MSAs analyzed

(c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

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Number, Types, and Size Distribution of Health Insurers

• Health insurance mandate– Requires that an insurance company (or a

health plan) covers specific• Benefits, • Health care providers,• Patient populations

– Inefficiencies• If the costs of the state mandates are not justified by

their benefits

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7

Barriers to Entry

• Scale economies in administering health insurance– Existing firms with large volumes of output can

underprice new, low-volume competitors and discourage their entry

• Empirical evidence– Blair et al. (1975)

• Long-run economies of scale exist

(c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

8

Conduct of the Private Health Insurance Industry

• Oligopoly with a relatively large competitive fringe– Few insurers account for a relatively large

proportion of earned premiums– Entry barriers do not seem to seriously impede

entry into the industry• Relatively large competitive fringe.

– Significant amount of price competition

(c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

9

The Dominant Insurer Pricing Model

• Some health insurers– Have become quite dominant over time

• While others have remained fairly small in terms of market share

• Organizations become dominant because– Sheer luck (first-mover advantage), – Technical and pecuniary economies– Superior performance, – Mergers with other organizations