# To What Extent is an Oligopolistic Market Structure of Health Insurance Providers to Blame for Inefficiency in the United States Healthcare Market?

Abstract

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## Introduction

Despite the standard of healthcare being roughly equivalent to other highly economically developed countries, consumer spending per capita on healthcare in the United States is much higher than the other top ten economically developed nations in the world, with spending in 2014 at \$9,086 per capita. This amounts to spending on healthcare representing over 17% of Gross Domestic Product in the United States. It is for this reason that there is inefficiency in the US healthcare market; if all highly economically developed countries can achieve almost an identical average life expectancy, why must the USA spend a much higher percentage of their GDP to achieve it?

One solution could be the structure of the market is to blame; the United States is the only member of these countries to have an almost entirely privately funded healthcare system. Other high-income nations such as the United Kingdom and France have government sponsored programs to help its citizens pay for their healthcare. These are the National Health Service (NHS) and Couverture Maladie Universelle (CMU) respectivly. It was only recently that the United States introduced legislation for this in the form of the Affordable Care Act, commonly known as Obamacare.

Only ’free market’ or ’private market’ structure would potentially lend itself an oligopoly of health insurance providers, as there are realistically only a small number of firms that have sufficient capital to offer the public masses insurance policies. However, other reasons also accountable for this high expenditure, namely inefficiencies in the healthcare market. This may be because of firms wishing to maximise profit at the expense of absolute inefficiency, among other theories. The underlying evidence of high expenditure on healthcare is undeniably empirical, but the research question allows an investigation to ascertain if this seemingly unnecessary expenditure is due to only one factor, or if it is due to a variety of factors.

It must also be noted that a high proportion of income in the United States is dedicated to healthcare, either through insurance premiums or direct payment to hospitals. This makes the conclusion of the research question relevant to hundreds of millions of people, determining the cause of the inefficiency in the market may assist with finding a solution. Methods of determining the primary cause of inefficiency are suitable to be subjected to economic analysis through use of primary and secondary data. This will be done by determining if there is indeed an oligopoly of insurance providers, determining average costs and marginal revenues to ascertain if abnormal profits are being made, among other analyses. Other areas to be considered are administrative inefficiency, consumer choice, allocative inefficiency, and productive inefficiency.

## Economic Theory

### Oligopoly

An oligopoly market structure is one that is composed of a small number of firms having control of a large proportion of a certain market. An oligopoly is similar to a monopoly, but in the case of an oligopoly, two or more firms own a large market share, as opposed to a monopoly where only one firms owns a large market share. The market share owned by the oligopoly can be expressed as a concentration ratio. This is written in the form of $$CR_{x}$$ where CR represents the concentration ratio, x represents the number of firms, and the percentage represents the share of the market that the oligopoly has control of. An oligopoly may be defined as the concentration ratio of less than eight firms having a market share of between 25% to 80%. More than 80% would be classified as a monopolistic market structure, and less than 25per would be indicative of the firms not owning a sufficient market share to influence price levels and quantities of demand and supply.

#### Indicators of an Oligopoly

There are four dominant indicators to see if an oligopoly exists within a market. The first of these is what is known as firm interdependence where and price rigidity. In an ideal situation, from the point of view of a firm operating within an oligopoly, a firm would know the price at which other operating firms plan to set their products at. This is because of the effect the price of other firms’ product will have on the quantity produced and sold of an individual firm. The kinked demand curve shown below will indicate as to why this is the case. In order for the following explanation to be coherent and concise, definitions of the following terms will prove beneficial. Price elasticity of demand can be defined as the level of responsiveness of demand based on a change in price. Marginal revenue can be defined as the additional revenue gained from one additional unit of output. Marginal cost can therefore be defined as the cost of producing one additional unit of output. Average revenue may be defined as the revenue gained from each unit that is sold. It can be expressed as the formula: $$TR/Q$$ As shown on the kinked demand curve, the demand curve above Price 1 is very elastic. This means that there is a greater than proportional change in quantity demanded for a change in price.