THE OLIGOPOLY

 

Summary: Gov. Mike Beebe, state legislators and the Obama administration have not advanced a “private option” to expand Medicaid.  They have created an oligopoly, a market type characterized by a few suppliers able to capture above-average profits with government assistance.  The most likely outcomes are shortages of consumer information and medical services.

 

(June 2013) Business enterprises in a market-based economy serve consumers. Any enterprise intent on selling a good or service begins by asking, ‘What are the economics?’  The problems to be solved include determining market type, estimating consumer demand, identifying the required supply of the product, assessing the costs involved, and setting prices using market signals. These issues are not merely academic.  They are practical, and will determine whether or not the enterprise is a success.

 

Arkansas proponents of government enterprises, including politicians also claim they serve humanity, though they rarely cite1 economic factors. One example is the new government enterprise, termed “the private option” that proposes to supply medical insurance to more than 250,000 Arkansans.

 

FOIA Evidence

 

The so-called private option was built on political logrolling,2 not economics.  Arkansas officials would have identified the market type (oligopoly) before drafting legislation if economics were at issue.  The Policy Foundation filed a Freedom of Information Act request (June 14) with Arkansas Insurance Commissioner Jay Bradford for “any public record held by your department that purports to show a competitive, non-oligopolistic medical insurance marketplace is achieved when at least two (2) insurance companies operate within it.”  The Arkansas Insurance Department, in response (June 24), acknowledged, “We do not have anything responsive to that request.

 

Characteristics of Oligopoly

 

Economists, in a multi-century period have developed four basic market types: monopoly, oligopoly, monopolistic competition and pure competition.3

A market tends to oligopoly when it is characterized by “fewness,” i.e., there are a small number of enterprises selling a product.  Only five insurance companies will enter the Arkansas market, the Insurance Commissioner reports.4  Oligopolies have high barriers to entry.5 These barriers prevent other firms from entering the market in search of profits.  Another characteristic of oligopoly is imperfect knowledge on the part of consumers.

 

Early Evidence from Arkansas

 

Policymakers in other states considering Medicaid expansion should be aware that early evidence from the Arkansas medical insurance market suggests a shortage of consumer information.6 Three years ago, the U.S. Department of Health and Human Services estimated “the creation of a national high-risk insurance pool will result in roughly 375,000 people gaining coverage in 2010.”7 Arkansas officials estimated 2,500 would enroll. But total U.S. enrollment was only 110,298 on April 30, including only 895 in Arkansas.8 This year’s enrollment period will provide additional evidence.

 

Conclusion

 

Arkansas policymakers have created an oligopoly. A document obtained under FOIA reveals they failed to investigate how an oligopoly would reduce competition and harm consumers.  The decision to expand Medicaid was based on politics, not economics.  Early evidence from the Arkansas insurance market suggests a shortage of consumer information. 

 

--Greg Kaza


1 One exception is the Quick Action Closing Fund, started in 2007 with $50 million “specifically directed for economic development.” Gov. Beebe, in March 2007, said, “The funds will give the State the ability to negotiate for workforce training, capital investments, and other projects to help collaborate with businesses and manufacturers interested in locating or relocating their facilities in Arkansas.” He added, “We need a renewed emphasis on industry retention while helping to expand the businesses already here and attracting new ones.”  http://governor.arkansas.gov/newsroom/index.php?do:newsDetail=1&news_id=693 Arkansas total payroll (1,207,200 to 1,183,100) and manufacturing (192,900 to 154,300) employment have both declined since March 2007. Source: U.S. Bureau of Labor Statistics

2 The Public Choice School of Economics, including the 1986 Nobel Laureate James M. Buchanan (1919-2013) developed the idea of logrolling to explain why politicians’ actions lead to economic inefficiency.  Medicaid was expanded in Arkansas via a political logroll between Democrats who supported the policy, and a bloc of Republicans supportive of tax cuts and other policies.

3  A monopoly is a single enterprise supplying a product.  Monopolistic competition features many producers and consumers, non-price differentiation and few barriers to entry.  Characteristics of pure competition include zero barriers to entry, perfect information, the inability of any economic agent to affect prices, and arbitrage benefiting consumers.

4 http://www.insurance.arkansas.gov/index_htm_files/pr2013-6-7.pdf

5  Legislators did not reduce barriers to entry in expanding Medicaid, a contributing factor to shortages that will increase as the demand curve for coverage shifts to the right.  APF research memo (May 2013), “Medicaid Expansion and Economic Shortages”

6  An alternative explanation is government failure to accurately forecast demand in the insurance market.

7 “Estimated Financial Effects of the “Patient Protection and Affordable Care Act,” as Amended.”  U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, http://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf.  (p. 16, paragraph 3)

8 https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/pcip-enrollment.html