|Federal Information & News Dispatch, Inc.|
Mr. Chairman and members of the Committee, thank you for inviting me to testify on the subject of "Health Care Consolidation and Competition after PPACA."
My name is
My testimony today focuses on how I expect competition and consolidation to play out in the health insurance sector under the new rules and regulations established in the Patient Protection and Affordable Care Act (PPACA).
The PPACA significantly expands, both in scope and in detail, the federal regulation of commercial health insurers. A number of its provisions are likely, over time, to reduce competition in that sector. The reduction in competition will result from provisions in the PPACA that standardize coverage, increase premiums, raise barriers to market entry, and encourage industry consolidation.
The first set of relevant provisions are those that have the effect of standardizing health insurance coverage.
When government imposes regulations that standardize a product, producers of the item are, obviously, less able to compete on the basis of product differentiation. The product becomes more of a commodity and competition among suppliers becomes focused mainly on price. Other factors, such as convenience or brand identity, may enable some producers to charge marginally higher prices, but even that pricing power is fairly limited in a commoditized market.
At least five provisions of the PPACA will intentionally standardize health insurance to varying degrees:
1. Section 1302 instructs the
2. Section 1302 also limits deductibles for employer plans in the small-group market and limits total enrollee cost-sharing for all health plans to the levels specified in the tax code for qualified High Deductible Health Savings Account plans.
3. Section 1201(4) requires all individual and small group health insurance policies to provide coverage for the essential health benefits package.
4. Section 1001(5) requires health insurers and employer plans to cover numerous preventive services with no enrollee cost-sharing.
5. Section 1001(5) prohibits health insurers and employer plans from setting annual or lifetime coverage limits "on the dollar value of benefits."
In a commodity market where competition is focused principally on price, firms that are able to reduce their costs through economies of scale can generally offer better prices and thus gain market share at the expense of their competitors. As a result, markets for commodities tend to be dominated by a few, large firms. Those firms achieve their dominant size by either under-pricing smaller rivals or acquiring competitors.
The provisions of the PPACA that standardize and commoditize coverage are likely to drive a similar dynamic in the health insurance market. Furthermore, because these are new, federal standards, the effects will be national in scope. Even carriers that have long been dominant in a particular state or region will find it harder to maintain their position and keep larger, national players at bay.
Increasing coverage costs
The above provisions will not only standardize coverage, but in many cases will increase coverage costs as well. For example:
* The Administration conducted an economic analysis of the effects of their regulations implementing the PPACA's preventive services coverage requirement. They concluded that, "The Departments estimate that premiums will increase by approximately 1.5 percent on average for enrollees in non-grandfathered plans. This estimate assumes that any changes in insurance benefits will be directly passed on to the consumer in the form of changes in premiums." n1