Academic journal article Applied Health Economics and Health Policy

Public Option and Private Profits: What Do Markets Expect?

Academic journal article Applied Health Economics and Health Policy

Public Option and Private Profits: What Do Markets Expect?

Article excerpt

Background

The debate on US healthcare reform has largely focused on the introduction of the so-called 'public option', a federal government-run health insurance plan. The supporters argue that the addition of a public plan would enhance competition in the health insurance market, leading to reductions in premiums and costs, and to a larger variety of choices for citizens. On the other hand, the opponents contend that the public plan would represent an unfair competitor, which may squeeze several private health insurers out of the market and, in the longer term, potentially lead to the 'collapse' of the private health insurance industry.

National polls and surveys show that a majority of citizens and physicians favour a public option that would co-exist with private plans.[1,2] However, representatives of the health insurance industry have strongly opposed the introduction of a public plan. America's Health Insurance Plans (AHIP; the insurance industry's trade association) has argued that it would damage healthcare providers and endanger the existence of the entire private healthcare system.[3]

The impact of the public plan on private insurers is likely to depend on the extent of competition that exists in the health insurance market. Several studies indicate that the insurance market is now highly concentrated. A study by the American Medical Association shows that, in most states, between one and three providers control most of the market share.[4] Herfindahl-Hirschman Indices of concentration, which are used by antitrust commissions to decide on the viability of mergers and acquisitions, also point to high levels of market concentration in most states.[5] In recent years, health insurers seem to have increased the degree of market power they can exercise in several geographic regions.[6]

As the markets are far from perfectly competitive, the introduction of a major new player can substantially erode the market shares and profits of existing companies.

This article aims to contribute to the debate by providing empirical evidence on the impact that the 'public option' is likely to have on private health insurers. While the debate has been vigorous, no study to date has provided an estimate of the expected effect.

This study utilized data from prediction markets on a security whose pay-off was linked to the outcome of the uncertain event that a federal government-run healthcare plan, the 'public option', would be approved by the end of 2009, to investigate the effect that the public plan is expected to have on the value and profits of health insurance companies. The price of the security can be interpreted as the best estimate of the probability that the market assigns to the public option being approved. By matching data on the public option probability with the evolution of stock returns over the same period for the set of private health insurance companies quoted in the New York Stock Exchange (NYSE), the study infers whether financial markets expect healthcare companies to have significantly lower future earnings if the public option is adopted.

Methods

Sources of Data

To evaluate the effect that the public option is expected to have on private insurance companies, the study utilized daily data on the price of a security traded on a prediction market (http://www.intrade.com). The security offered a pay-off that was contingent on the outcome of the event "A federal government-run health insurance plan (a 'public option') is approved in the US by 12:00AM, 31 December 2009." The security was to pay off a determined amount only if the event was realized by the deadline, and pay nothing otherwise.

Prediction markets are structured in a way that the price of the security at each point in time can be interpreted as the probability that the market assigns to the event being realized (previous work has outlined the sufficient conditions under which prices can be taken to correspond to the market's mean beliefs). …

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