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ESSAY OF THE WEEK |
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Question
The following appeared in the news section of a local paper:
Critics expressed concern over the sale of A-1 HMO to ABC Company, the state's largest insurer. Critics claim that the sale will reduce competition and increase health care costs. ABC Company says that its new, larger size will allow it to negotiate better deals for service for its customers."
Discuss how well reasoned you find this argument. In your discussion, be sure to analyze the line of reasoning and the use of evidence in the argument.
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| William Wallace: 7/31/2009 |
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It is indeed correct that the sale of A-1 HMO to ABC Company will increase the HHI and reduce competition. However, the Critics allegation that the transaction will increase Health care costs just because of the sale doesn't suffice completely. As long as the sale doesn't create the natural monopoly in the industry and the healthy competition remains intact, ABC Company is expected to behave as per the demand-supply balance. Besides, the transaction can allow the acquirer to reach economies of scale/scope and reduce the cost it incurs in providing the services. It can thus provide better and more services in the same premium amount to its customers. It will thus the entice the customers and will force the competitors to come up with the differentiated products/schemes to combat the ABC Company's burgeoning consumer base and survive in the industry. It will thus aid in the healthy competition which, in turn, will benefit the customers only. However, if ABC Company is acquiring the firm just with an intention of creating the natural barrier to entry and making the life of its competitors miserable, the government needs to come forward and impose certain regulations that can keep the competition alive in the industry |
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Reference Essay |
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The sale of one insurer to another will reduce competition, because the number of independent providers in a market has decreased. A reduction in competition may be irrelevant. If ABC Company is a nonprofit, its concern is covering costs, not making money. If health care costs under the new arrangement increase, the likely reason is that service costs have risen. In this case, the outcome would have been the same, regardless of who purchased A-1 HMO. The argument would be stronger if the passage indicated whether ABC was a for-profit or a non-profit company.
A-1 and ABC may not operate in the same markets and the purchase may allow each company to expand into new coverage areas. It's also possible that an HMO may be able to offer health insurance less expensively in some areas, and ABC Company will introduce A-1 into areas not currently served by the HMO. In this case, competition in some markets may actually increase. The argument against the sale would be stronger if it discussed the companies' expansion plans.
The unit being sold is an HMO. The passage does not indicate that ABC Company is an HMO. The fact that A-1 is an HMO and ABC may not be, may mean that A-1 and ABC take different approaches to providing health insurance. The purchase of A-1 HMO may simply mean that ABC Company has a range of insurance products to offer potential buyers. The argument against the sale would be stronger if it discussed the reasons that ABC Company purchased A-1 HMO.
ABC Company may preserve the independent character of A-1 HMO. If ABC Company does not make substantial changes to the way A-1 operates, the net effect of the sale may be negligible. The argument would be stronger if it provided an indication of what ABC Company plans to change after A-1 is purchased.
Based on the information in the passage, it is not possible to conclude that the sale of A-1 HMO will increase the cost of health care.
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