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Everyone's heard of "death panels" it seems. But what the heck is the Herfindahl-Hirschman Index? And what does it have to do with health care reform?
Well, before I explain it precisely, let me just start off by comparing to death panels. First off, the Herfindahl-Hirschman Index exists. Death panels do not. Second, death panels go well with Carmina Burana. The Herfindahl-Hirschman Index? Not so much. Maybe a Bach Fugue. Or Music For 18 Musicians. Third, the Herfindahl-Hirschman Index actually does have something to do with health care reform. Death panels do not.
Okay, I know the suspense is killing you. So what is the Herfindahl-Hirschman Index, anyway? Simple: it's a measure of market concentration, which allows us quantify precisely how concentrated a market is. You take the market share (percentage) of each participant in a given market, and square it. You add up all the squares and that's the Herfindahl-Hirschman Index (or "HHI" for short, now that I'm in demystification mode.). If there are 100 market participants, all with an equal 1% share in the market, the HHI is 100. If there's just one company-a complete monopoly, the HHI is 10,000. If there's 10 companies each with an equal 10% share, the HHI is 1,000. But the HHI allows us to compare any configuration, not just these easy-to-describe cases. (I first learned about the HHI last December; I'll tell a little story about that at the end of this diary.)
The Federal Trade Commission and the Department of Justice Anti-Trust Division regard markets with an HHI of less than 1,000 as "competitive", those with HHI's of more than 1,000, but less than 1,800 as "concentrated," and those with an HHI of 1,800 or more as "highly concentrated." A 2007 report by the AMA, "Competition in health insurance: A comprehensive study of U.S. markets (pdf)," covering 44 states and 313 Metropolitan Statistical Areas (MSAs) found that virtually all the combined PPO & HMO markets in country were highly concentrated. (As were the PPO and HMO markets considered separately.) Here's a chart I generated of the state markets:
And here are the MSAs:
The extreme concentration shown in these charts is a clear and compelling reason why there's a need for a public option to ensure the existence of a genuine competitive market.
More background and information from the AMA survey on the flip.
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