12 November 2009

Iron Law of Oligarchy Alive and Well In Colorado

One of the oldest empirical economic theories is that markets naturally tend to towards oligarchy, now called oligopoly, where a small number of firms dominant a given market. Health insurance in the Colorado market is not exception.

Five firms dominate the health insurance market in the state.

The biggest five companies in the state — Anthem Blue Cross Blue Shield, United Healthcare, Aetna Health, Cigna and Kaiser Permanente — insure a combined 3 million Coloradans. The largest two, Anthem and United Healthcare, hold more than half of the private insurance market in the state.

In addition, Rocky Mountain Health Plans, a private non-profit health insurer, has a meaningful market share in Western Colorado. Anthem, Kaiser and Rocky Mountain are putatively non-profits or co-operatives. Kaiser is distinctive because it is vertically integrated - it both provides health insurance and runs the hospitals and doctor' offices that provide most of the covered services.

As recently as 2007, the health insurance market in Colorado was far less concentrated. Many smaller health insurance companies have left the market, apparently due to an inability to make a profit at market health insurance rates, many of those that remained merged, and many of the smaller companies that remain charge quite high rates.

Employers are requires to provide worker's compensation insurance in most cases, and this, rather than health insurance, provides health care for work related injuries. The dominant player in that market in Colorado is government chartered enterprise Pinnacol Assurance. It says it has a 57% market share. The rest of the players are shown here. The top five providers, including Pinnacol, have an 80% market share, the top ten have a 90% market share.

Private health insurance, worker's compensation insurance and medical malpractice insurance (discussed below), are all overwhelmingly purchased by employers, rather than by households, where automobile, renter's and homeowner's insurance, and a good share of all life insurance, is purchased.

Several public or subsidized health care systems also deserve mention. Cover Colorado is an industry subsidized option to allow the uninsurable to buy some sort of expensive health insurance plans. Medicare is a single payer provider for senior citizens (and is often supplemented by health insurance policies that cover what Medicare does not). Medicaid provide health care to the poor on a means tested basis (and subsidized nursing home care to less affluent older people and to children who buy into the program through the SCHIP program). The Veteran's Administration provides health care to certain military veterans (and the U.S. military tends to provide its own health care to active duty service members). The VA, like Kaiser, is vertically integrated; it is a health care provider as well as a health care payer, while the others are health care payment systems, not providers.

Of course, many people in Colorado have no health insurance or government program to provide health care and obtain what health care they can get from direct payment of health care providers, free or low cost clinics, and by going to emergency rooms which are required to stablize everyone who comes to them, without regard to ability to pay.

Medicare pays approximately the actual cost of care (and some providers don't take it). Private insurance companies pay a premium estimated to be about 15% to cover the bad debt and Medicaid patients that providers serve. Medicaid pays far less than the cost of care to providers (and many providers don't take it). The VA and Kaiser both have relatively low provider costs due to their vertical integration.

Most private insurers in most plans have incentives for people in the plan to use network providers who negotiate their rates with the insurance companies. Providers who provide services outside health insurance networks to insured patients typically charge a modest premium over the network rate that would be charged by a private insurer.

Outside subsidized clinics, the uninsured pay a huge premium for the same care over the price paid by those with health insurance, which is largely a reflection of the high risk providers face of non-payment for this class of patients as a whole, although it is often possible to secure discounts for payment up front in cash to bring prices down to something close to what insurance companies pay on a case by case basis.

While fewer than 20% of people in Colorado lack any health insurance, many people use the uninsured private pay system for dental care, women's health and mental health care, that is often not covered by someone's health insurance plans. Alternative medicine and health oriented witness programs are also organized almost entirely run on a private pay basis, often with sliding scales.

There are other means of obtaining health care, particularly in the very thin non-group health insurance market, but they don't have much of an impact on the market. The non-group market is essentially useless for providing pregnancy coverage, coverage for mental health conditions, and coverage for pre-existing conditions, because adverse selection/moral hazard risks are so high, and because individual health insurance plans are revocable at will arrangements, rather than long term contracts. First party medical coverage for care insurance (an optional pale shadow of Colorado's former "no fault" automobile insurance system), can also be a rational option for drivers who don't have health insurance for potential off the job accidents.

Another key insurance player in the Colorado market is COPIC which is the dominant medical malpractice insurer in the state (with market share of 90%+) which is indirectly controlled by the Colorado Medical Society and operates in practice like a consumer cooperative although that is not precisely the way that it is organized.

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