Research Shows Costs Are Lower in States With Dominant Insurers

The current presumption in the halls of power is that if insurance markets were less consolidated, insurance would cost less. President Obama and Senate Democrats have cited this as a justification for the public option; and, when House and Senate committees voted recently to repeal the insurance companies' antitrust exemption, they repeated the same mantra.

In a previous post, I explained why increased insurance competition won't necessarily reduce healthcare costs, which are the main ingredient in insurance rates. Now Excellus Blue Cross Blue Shield, which has long controlled about 70 percent of the insurance market in Rochester, NY, has drawn attention to some research that makes the same point in much greater detail.

Notably, the research was not commissioned by Excellus or the insurance industry association. Most of it comes from the Dartmouth Institute for Health Policy and Clinical Practice, a division of Dartmouth University, which has led the nation in health services research for decades.

In a February 2009 report, the Dartmouth Institute found that, among states with the top 10 insurance market concentrations, all but Rhode Island showed lower than national average levels of Medicare spending per enrollee in 2006. In seven of the 10 states, spending was at least 10 percent lower than the national average. In Hawaii, where most of the market is split between a Blues plan and Kaiser Permanente, it was 36 percent less.

Several of the other states are predominantly rural, and health spending tends to be lower in rural areas. But in upstate New York cities like Rochester, Buffalo, Syracuse and Binghamton where one or a few insurers are dominant, health costs were also far below the national average. In Rochester, Medicare spent 18 percent less than the average on patient care; in Binghamton, it was 21 percent less.

Another national survey by Milliman Inc. in 2008 found that the monthly cost of a standard group PPO policy was substantially lower than the national average in upstate New York. In Rochester, it cost 25 percent less; in Buffalo, 22 percent less. (Milliman, by the way, is a consulting and research firm that does work for health plans.)

The modest health costs in this region are not related to poor-quality care. Excellus compared data from the New York Department of Insurance with figures from several national insurers and found that in upstate New York, an average of 89 percent of premiums were spent on patient care; in contrast, the national carriers' average was 82 percent. Moreover, U.S. News and World Report ranked Excellus and several other dominant plans in the region among the best in the country.

Excellus offers several explanations for the relatively high quality and low costs in upstate New York. It points out that the area has some superb healthcare organizations, that access to care is fairly good because the rate of uninsured is low, and that in Rochester, there has been a long history of collaboration between insurers, providers, and employers to keep costs under control.

The research gathered by Excellus suggests that there is a correlation between the market power of certain insurers and lower costs. That does not mean that some carriers-especially national companies-are not using their dominant position to extract excessive profits. But even if increased competition cut those profits, overall costs might actually rise as providers jacked up their prices to health plans.