Monday, November 02, 2009

Is Health Care a Natural Monopoly?

Charm Coach asked me to expand on the question of whether or not insurance is a natural monopoly.

I admit, when I hear the term "Natural Monopoly," I think of instances where there is a physical reason for a company to have a monopoly. For example delivering electricity to houses requires telephone poles. The company that puts up the telephone poles is able to leverage that to gain control over everything that goes to a house that involve wires.

Railroads require a right of ways ... this is a physical barrier that can be leveraged to create a monopoly.

The medical industry does not have any natural barriers that would prevent doctors from popping in and out of the market. There are no barriers that prevent people from choosing which clinics to use.

Unregulated insurance does not have any natural barriers that prevent investors from creating new pools. The new pools may not be financially stable, but there are no natural barriers to prevent a group from declaring the existence of a new pool.

The barriers come from the way things are regulated. Politically connected insurance companies work with regulators to create a market that favors their products.

The real evil comes when insurance companies negotiate pricing deals with health care providers ... or take the step of using their insurance reserves to buy providers. They are then able to leverage both sides of the health equation to give themselves an unnatural advantage in the market.

It are these unnatural relations that give insurance companies their monopoly poweer. These unnatural powers are also the things that give insurance companies the ability to lock people outside their covered base from health care.

So, it is the political structure that creates monopolies in health care.

The current structure of our financial system also leads to the creation of monopolies. The free market described by Adam Smith had individuals reinvesting their resources as they see fit. Our current capital markets are designed more for the business war model of thought. The fractional reserve system of the fed and the capital market on Wall Street create a structure where market insiders are able to raise huge sums of capital in efforts to corner a market.

Of late, there's been a number of businesses with the model of dominate the market or fail. These efforts tend to undermine the entire market.

The structure of financial markets can create a drive for monopoly status.

IMHO, many of the forces that lead to consolidation in the market are unnatural creations of the political and financial market.

Of course, when we look at the areas where we see natural monopolies, one realizes that it is often possible to create a political structure to break down the monopoly power in an industry.

For example, we could create competition in data communications if we restructured the industry so that home owners owned the wire that ran from their house to a local communication center. If a buyer's coop in your neighborhood owned the wire to a communication center, a large number of internet companies and cable companies would offer service from that box ... giving people in your hood access to competition which is currently lacking.

The truth of the matter is that, if we worked at each of these issues, we could find ways to induce competition. For example, we could break the cable and internet monopolies simply by letting home owners own the data cable running from their house to a communication center. Internet service providers would then compete on providing services to communication center ... giving everyone in the neighborhood more communication choices.


Scott Hinrichs said...

But it's so much easier to keep customers with the command and control model.

Anonymous said...

I think that when I hear the term "natural monopoly" I consider the avergae-dost model of economies of scale. I believe an insurance company's success depends on keeping its average costs down, which can be achieved by adding more and more premium-payers to the income stream: the more payers, the lower the average costs (generally caused by relatively view chronically sick individuals).
Thoughts on my thoughts?--Charmcoach

y-intercept said...

Taking on more customers would only reduce average costs if the new customers have a lower average cost than existing customers.

Insurance companies don't live to reduce costs, they live to give their shareholders high guaranteed profits.

As such, insurance companies seek monopoly status as they feel it would give them the power needed to create sustained high profits.