Competition in Health Care

"The principles of Jefferson are the axiom of a free society"

Abraham Lincoln

A Nonpartisan Economic, Health and Public Policy Research Foundation

Competition in the Health Care Market


"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

                                                                                    Adam Smith  Wealth of Nations


Competition in business is the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms. It may stimulate innovation, encourage efficiency, or drive down prices, competition is often promoted as the foundation upon which the free enterprise market system is justified. According to microeconomic theory, no system of resource allocation is more efficient than pure competition. Competition, according to the theory, causes commercial firms to develop new products, services, and technologies. This gives consumers greater selection and better products. The greater selection typically causes lower prices for the products compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).

At one extreme is perfect competition. At the other extreme is monopoly. In perfect competition there are many competitors each producing an identical product. Each competitor makes a minimal profit. Orthodox economists fully acknowledge that perfect competition is seldom observed in the real world, and so aim for what is called "workable competition".  This follows the theory that if one cannot achieve the ideal, then go for the second best option by using the law to tame market operation where it can. Workable competition is also known as “monopolistic competition”. In this category each competitor makes enough of a profit to be motivated to stay in the market and be innovative at reasonable prices. This is our goal in bringing market reform to health care.

A simple neo-classical model of free markets holds that production and distribution of goods and services in competitive free markets maximizes social welfare. This model assumes that new firms can freely enter markets and compete with existing firms, or to use legal language, there are no barriers to entry. By this term economists mean something very specific, that competitive free markets deliver allocative, productive and dynamic efficiency. Allocative efficiency means that resources in an economy over the long run will go precisely to those who are willing and able to pay for them. Because rational producers will keep producing and selling, and buyers will keep buying up to the last marginal unit of possible output - or alternatively rational producers will be reduce their output to the margin at which buyers will buy the same amount as produced - there is no waste, the greatest number wants of the greatest number of people become satisfied and utility is perfected because resources can no longer be reallocated to make anyone better off without making someone else worse off; society has achieved allocative efficiency.

Contrasting with the allocatively, productively and dynamically efficient market model are monopolies, oligopolies, and cartels. When only one or a few firms exist in the market, and there is no credible threat of the entry of competing firms, prices raise above the competitive level, to either a monopolistic or oligopolistic equilibrium price. Production is also decreased, further decreasing social welfare by creating a deadweight loss.

Sources of this market power are said to include the existence of externalities, barriers to entry of the market, and the free rider problem. Markets may fail to be efficient for a variety of reasons, so the exception of competition law's intervention to the rule of laissez faire is justified

If a firm has a dominant position, then there is "a special responsibility not to allow its conduct to impair competition on the common market". Similarly as with collusive conduct, market shares are determined with reference to the particular market in which the firm and product in question is sold.

Currently we have a planned economy in health care; and a command economy in Medicaid, Medicare, Tri-care and Veteran's Care. A planned economy is an economic system in which the state or government to one degree or another manages the economy. Its most extensive form is referred to as a command economy, centrally planned economy, or command and control economy) In such economies, the state or government controls all major sectors of the economy and formulates all decisions about their use and about the distribution of income. The planners decide what should be produced and direct enterprises to produce those goods.

 Planned economies are in contrast to unplanned economies, i.e. a market economy, where production, distribution, and pricing decisions are made by the private owners of the factors of production based upon their own and their customers' interests rather than upon furthering some overarching macroeconomic plan. Less extensive forms of planned economies include those that use indicative planning in which the state employs "influence, subsidies, grants, and taxes, but does not compel A planned economy may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both  Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, the means of production are publicly owned. That is, a planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc." but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry. Therefore, command economies are planned economies, but not necessarily the reverse.

 Central governments are tempted to solve problems quickly by introducing additional market regulation. Once such regulation is introduced, it is rarely removed, ratcheting towards a gradual increase in government power and a constraint on the mechanism of the free market. Usually, big business has an advantage over small business in a strongly regulated market, because big business can cope with the bureaucracy and small business cannot take advantage of adaptivity.

Transparency is important since it is one of the theoretical conditions required for a free market to be efficient. In economics, a market is transparent if much is known by many about

The reality of competition is that it has both beneficial and detrimental manifestations; it comes in both constructive and destructive forms. Destructive competition is competition in which there is a clear winner and loser, where victory is had at the definite detriment of another. Destructive competition is characterized by the tendency toward extreme, unhealthy competition which has been termed hypercompetitive.

Destructive competition forces several producers out of the market. Destructive competition usually occurs when there are so many producers of a product that prices are driven down to the point where no one makes a profit. It can also happen if a single producer is significantly wealthier than other producers and can afford to cut prices drastically until the other producers are driven out of business.

Constructive competition, on the other hand, is competition in which destructive activities towards a competitor are strictly excluded.  In this way, the competitors can only compete by making themselves stronger, and so they only become more capable of dealing with other competitors and circumstances as time passes, and hence achieve mutual success.  The problem with constructive competition is that it only works if both competitors behave in this constructive fashion.  If one competitor behaves constructively, while the other chooses to carry out destructive activities, since destruction is more effective than construction the constructive competitor would quickly lose.  Therefore, no one can behave in a constructively competitive manner unless they can be assured that their competitor will behave likewise. This is the function of the market institution.

Competitors in health care need to stay focused on the common goal of providing the highest  quality care to patients at lowest possible price. Health care will always be expensive because the demand is high and resources are limited. The major stakeholders in health care have always tried to avoid competition. For competition to work properly in health care we need to define the rules of engagement for the market place. We need to establish a level playing field so that no one participant becomes dominant. Power imbalances lead to market dysfunction. Insurance companies can compete on how much quality they provide per premium dollar. This would be constructive not destructive. It would lead to innovative ways to lower risks. It would lead to incentives for patients to maintain a healthy lifestyle and use preventative care because it would lower their risk category and premium price. This ultimately is win-win.

Competition among providers can also be constructive. Competition gives incentives for self improvement. Each physician can provide the patient with information and price options so that the patient can make informed decisions about their health care. This will improve each physician’s skill and knowledge with time. Hospitals will compete on the basis of how efficiently they can provide appropriate care to the patient.