The logic behind the design of the Affordable Care Act does not hold up well when faced with the reality of how markets actually work outside cities. ACA exchanges were built on the fundamental idea that competition between regulated private insurance companies would improve quality and hold down prices, but competition is lacking in most rural counties. That’s very unlikely to ever change.
Because of the way hospital networks and private insurers independently negotiate prices with each other in most of the country, rural hospitals are often de facto monopolies with massive leverage. As a result, only insurers that are also effectively monopolies can hope to negotiate for decent prices to drive out competition. Even increasing insurer competition in these concentrated hospital markets could actually make the cost problem worse.
More than 2,600 counties nationwide have a population density of less than 200 people per square mile. According to data from the Kaiser Family Foundation, 74 percent of these low population density counties have just two or fewer insurers operating on their exchange in 2017, and only 8 percent have four or more.
As several economists on the left have pointed out, local Republican efforts to undermine the ACA have made the issue worse. However, even in states that have expanded Medicaid — an indication they’re run by Democrats or Republicans with moderate stances on the ACA — 57 percent of these low-density counties have just one or two insurers.
Take, for example, California, one of the states most aggressively trying to make the ACA marketplace work. Among the 40 low population density counties in the state, 60 percent have just two insurers. If the insurer Anthem follows through on plans to leave many parts of the individual market, many of these counties could be down to just one insurer next year.
It should not be a surprise, given the design of our health care system, that this is a problem. In low-density areas, people often live within a reasonable distance of just one hospital or hospital network, which become de facto monopolies.
Insurers have relatively little leverage over these hospitals when it comes to negotiating rates. The insurer can’t really offer coverage in the area without the hospital in their network, but the hospital can afford to operate without accepting the rates offered by the insurer. These individual market plans cover only a small share of the population. In fact, the more insurers there are in such a market, the less possible leverage any one insurer has over a rural hospital.
Under our current system of negotiating fees between insurers and hospitals, research has found that markets with concentrated insurers and hospitals had 6.2 percent higher premiums than markets with competitive insurers and hospitals. Markets with competitive insurers and concentrated hospitals, however, had 8.3 percent higher premiums. The nature of how reimbursement rates are negotiated effectively pushes places with few hospital networks toward an insurance monopoly or duopoly.
Cities can be different. In a city there are multiple hospitals, so insurers have more leverage. Insurers can choose to exclude only one hospital from their network if that hospital asks for rates that are too high. More importantly, with several hospitals in an urban area, individual hospital networks can theoretically operate as their own insurer through HMO plans.
For example, organizations such as Kaiser Permanente are insurers and also own hospitals that their customers are required to go to for treatment. The insurance choices in San Francisco show how this works: Among the options are traditional insurers, the Kaiser Permanente HMO, and the Chinese Community Health Plan, a small HMO created by the city’s historic Chinese Hospital.
Effectively, these HMO plans allow hospitals to compete directly with each other and with traditional insurers. This is not a form of competition that can be replicated outside of cities where the population is not large enough to sustain multiple hospitals networks in one area.
While cities can be different, that doesn’t mean they always are. Thanks to years of hospital and physician group mergers, some urban locations have highly concentrated hospital markets. In some cities, large, dominant hospital networks also function as de facto monopolies, which can drive up prices. This creates similar market pressures in these urban areas pushing the insurance market toward greater concentration so that insurers can maintain some leverage in rate negotiations.
For example, Richmond, Virginia, has a highly concentrated hospital market and just one insurer on its ACA exchange. There is also Pittsburgh, where the University of Pittsburgh Medical Center network dominated the hospital market. There are only two insurers on local Pittsburgh exchange and one is the UPMC health plan, owned by the dominant Pittsburgh Medical Center. In fact, UMPC is the only insurer on the exchange in many of the counties surrounding Pittsburgh.
Among the 16 counties in the country with eight or more insurers, almost all have a population density over 750 people per square mile — and these insurers frequently offer HMO plans. The 2,000 least dense counties in the U.S. have an average of just 1.97 insurers on their exchanges, while the top 200 most dense counties average 3.35 insurers.
Massachusetts’s health care reform law served as the ACA’s model, but it is the third most dense state in the U.S. There are no extremely low population density areas in the state.
Other countries that use a model of competing, regulated private insurers have all-payer, which would help alleviate the problems faced by the U.S. health care system in rural counties. In these all-payer schemes, all health care providers are forced to accept the same standardized rate from all insurers — which makes it possible for multiple insurers to operate even in low-density areas, since they all have the same leverage over monopoly-like hospitals.
Convincing hospitals, doctors, and drug makers to accept an all-payer system would take a major political fight. Providers know that single-entity negotiating rates are almost assured to get a better bargain out of hospitals than our current mess of weak insurers. What’s more, any government effort to move in that direct would have to be all stick.
The ACA already gave away the biggest possible carrot to providers in the form of a mandate for individuals to buy health coverage and large subsidies to help them do so — subsidies that end up in insurers’ coffers. In contrast, when the Swiss adopted a law mandating individuals buy health insurance in 1994, the law also contained provisions giving the government power to set standard provider rates.