Amazing! Some Washington policy makers are now learning that when companies face competition, prices go down and service improves. Who could have foreseen that?
"With much of the focus on Obamacare now on how much individual premiums could increase next year, a new analysis suggests there's one way to keep them in check — more competition," the astonished Washington Post reported last week. "That's the conclusion of a new report from economists Leemore Dafny, Christopher Ody and Obamacare architect Jonathan Gruber."
When businesses compete for customers, they lower their prices. That principle even applies to health care.
"If every insurer that had sold individual policies in 2011 participated in Affordable Care Act insurance marketplaces this past year, average premiums for a benchmark exchange health plan would have been 11.1 percent lower in 2014, the economists found," the Post explained. "The analysis found that the increased competition would have lowered the premiums for the second lowest-cost "silver" plan in the Obamacare exchange. That mid-level plan is significant, because it's used to determine the size of premium tax credits available in each area."
Put simply, competition works.
One Cato Institute scholar explains how.
"As the experience with the car industry demonstrates, consumers benefit from competition," writes Simon Lester. "Companies who are forced to compete find ways to offer higher quality goods and services at the lowest possible prices. There can be little doubt that American car companies make better products than they would have if they had not faced foreign competition."
And like most everything else, health care is a product.
"Health care reform has been a contentious debate, to say the least," Lester acknowledges. "But if there are small changes that we can all agree on, we should push forward with them. If we want to help consumers get better service from the health insurance industry at lower prices, there is an easy way: free trade in health insurance."
The real question here is why this is news. It's basic economic theory and no one — not even President Barack Obama himself — doubts it. The White House touts competition as one of the benefits of the health insurance exchanges.
"Private insurance companies will compete for business based on cost and quality and they'll have to follow common-sense rules of the road that rein in the worst insurance industry abuses," the White House website says. "For Americans who get coverage through their job but can't afford it, the exchange will give them new choices. For small business owners, the exchange will level the playing field with big businesses and lower their costs."
All of that is true — if the markets are truly competitive. In many ways the ACA discourages competition. Insurance companies (which don't provide the health care) are entering into agreements with fewer and fewer doctors (who do provide the health care). These are the so-called "narrow networks" that determine whether you really can "keep your doctor."
But for now, let's celebrate that Washington has learned a lesson in economics. Competition brings out the best in all of us.