Health Insurance Markets Are Concentrated — and Getting More So

Just as employees are reviewing health insurance options offered by employers and only weeks before individuals and families can enroll in coverage through the Affordable Care Act’s marketplaces, the American Medical Association (AMA) reports that most health insurance markets in the United States have become even more concentrated than they were last year.

Over the past 20 years, most health insurance markets have become less competitive, limiting consumers’ options based on an analysis of market concentration for 384 metropolitan statistical areas (MSAs), the 50 states and the District of Columbia, the AMA researchers showed.

The health insurance market is not consolidated at the national level. But 14 states and almost half (46%) of the MSAs had one insurer with 50% or more of the commercial health insurance market, the report said. The AMA researchers found that almost three-quarters (73%) of the MSAs were considered highly concentrated according to standard definition of market concentration, an increase from 71% in 2014.

The market concentration has not gone unnoticed. Congress passed and former President Donald Trump signed into law the Competitive Health Insurance Reform Act (CHIRA) of 2020. Trump administration Justice Department officials said CHIRA would bolster antitrust enforcement efforts. Traditionally, the Justice Department has reviewed health insurance mergers and the Federal Trade Commission, mergers of hospitals, doctors and pharmaceutical companies.

The McCarran-Ferguson Act delegates regulation of insurance to the states. Martin S. Gaynor, an economist at Carnegie Mellon University in Pittsburgh and an expert on competition and antitrust issues, says CHIRA underscored that the McCarran-Ferguson Act does not shield health insurers from antitrust laws. But in Gaynor’s view, that was commonly understood about McCarran-Ferguson, and he points to the antitrust actions the Justice Department took to block Anthem’s proposed acquisition of Cigna and Aetna’s plan to acquire Humana. Both deals fell apart in 2017. “I don’t think (CHIRA) does much. But it’s a good thing to have this made explicit in legislation,” Gaynor says. Other legal experts do not think it was quite so clear that McCarran-Ferguson allowed for federal antitrust intervention in health insurance markets.

In any event, until the Justice Department — or an aggrieved hospital, health system or other insurer — brings a case under CHIRA, the effect of the law will remain untested. There are other ways the Biden administration could tackle market concentration, notes Sabrina Corlette, a research professor and co-director of the Center on Health Insurance Reforms at Georgetown University’s McCourt School of Public Policy in Washington, D.C. It could move to prohibit anti-competitive contractual clauses or require insurers (or health systems) that merge to put temporary limits on price increases after a merger, Corlette notes.

Discussion of health insurance concentration require a similar
 examination of consolidation among hospitals, health systems and physician groups. It almost seems as if one begets the other because when insurers consolidate, hospitals and health systems at least need to consider whether they should do so as well.

“Consolidation is rampant throughout the health industry on the insurance side and on the provider side,” says Corlette. “It’s kind of a vicious cycle that’s both an offensive strategy and a defensive strategy.”

Lovisa Gustafsson, MBA, vice president of controlling health care costs for The Commonwealth Fund, agrees, saying, “It’s almost like there’s a compounding effect. There is definitely some sort of a tension in a market when insurers or hospitals combine, as if maybe they egg each other on.”

But even if insurers did not consolidate, there are enough benefits for health systems to acquire hospitals and physician groups, if only to gain more geographic reach or to make themselves more attractive to employers, she adds.

“Why wouldn’t health systems want more negotiating leverage to command higher prices?” Gustafsson asks. “That’s why we see that when hospitals consolidate — prices go up.” In addition, hospitals and health systems can get higher profit margins from drug companies when they acquire physician practices and administer prescription medications in the hospital or a hospital-affiliated outpatient clinic, she notes.

In theory, consolidation among insurers (and providers) could result in cost reductions because of lower overhead and administrative costs. But the consolidation brings pricing power that tends to obscure any of those efficiency gains. A Commonwealth Fund report in 2015 showed that consolidation among health insurers leads to increases in premium costs, even though insurers with larger market share generally obtain lower prices from health care providers. The Commonwealth Fund’s analysts noted that more research is needed on the effects of insurer consolidation on enrollment, premiums and the costs of health insurance. Ideally, that research would show results for each insurer, plan, customer segment and the effects on local markets, the fund added. For example, researchers for the AMA showed that after UnitedHealth Group completed its acquisition of Sierra Health Services in 2008, health plan premiums in Nevada increased by 13.7%. “The findings suggest that the merging parties exploited the market power gained from the merger,” the AMA said.

It is difficult, however, to make blanket statements about whether a merger or acquisition among health insurers is good or bad for consumers without also considering what happens months or years after the fact, Gustafsson adds. “If there’s no competition, do you get good offerings in terms of lower prices or more consumer choice?” she asks. In some cases, premiums prices go up and in others, they go down, Gustafsson says. Because each market is different and many factors affect insurers’ ability to raise or lower premiums, it’s difficult to assess how a merger of insurers will affect consumer costs, she explains.

The research on what happens when hospitals and health systems combine is more robust. “We have more evidence and a clear-cut story there,” Gustafsson notes. “When hospitals consolidate, prices go up. We see that time and again. And when hospitals buy physician practices, prices go up.” 

Joseph Burns is a Cape Cod, Massachusetts, resident and an independent journalist who covers healthcare and health insurance.