Competition, the backbone of the free enterprise system, is generally encouraged in U.S. commercial markets. The theory is that more widgets and widget makers will ensure consumers get the best widget value for their dollar.
At the other end of the business spectrum, consolidation -- which can be interpreted as the antithesis of competition -- is thought to reduce consumer choice and reduce the competitive motive to keep prices low.
However, the more complex and convoluted the market, the more the effects of competition and consolidation can be diluted or redirected to some group other than the ultimate consumer.
In health care, there are multiple markets in play: insurers, hospitals, physicians and other providers all operate in their own individual markets. How competition and consolidation within each one of these markets affects consumers is not always clear.
Competition -- traditionally a key weapon in the battle against inflation -- has had mixed results in keeping health care prices down in both in the overall health care system as well as in each of these sub-markets.
A recent study by the RAND Corporation suggests that increased consolidation among insurers might reduce hospital prices in some areas.
Hospital prices were about 12% lower in places with the fewest insurers, according to the RAND study, published in Health Affairs this fall.
The RAND study also found that in most markets, hospital market concentration exceeds insurer concentration, which leads to higher hospital costs.
According to another report, this one from the Kaiser Family Foundation, health insurers face "modest" competition in most states. Using a 10,000-point scale known as the Herfindahl-Hirschman Index to assess the level of health insurance competition, the Kaiser Family Foundation report found 45 states scored at least 2,500 for the individual market and 39 states had the same score for the small group market. In this index, the closer to zero, the greater the competition. Markets with a score of 2,500 or more are considered "highly concentrated."
As the federal health reform law paves the way for adding between three million and six million newly insured Californians to the health care system, competition and consolidation could play increasingly important roles in the success of that system.
How can policymakers best take advantage of competition and consolidation in health care to ensure that the entire system -- and ultimately California consumers -- benefit?
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