Insurer Consolidation Pressures Providers And Consumers, Limits Competition

An interesting study by the American Medical Association looks at the effects of consolidation in the health insurance industry. It's principal focus is on consolidation's effects on physicians, but the study has interesting implications for health insurance purchasers, as well. You can download the study by clicking here...http://www.ama-assn.org/ama1/pub/upload/mm/368/compstudy_52006.pdf

The past decade has seen a huge wave of consolidation within the health insurance industry, which has given rise to a limited number of giant companies with considerable market presence. In 2000, the two largest insurers in the country, Aetna and UnitedHealthcare, had a total membership of 32 million insured lives. By 2007, following a wave of mergers, the two largest health insurers, Wellpoint and UnitedHealthcare, had 34 million and 32 million members each, respectively. Together, the two insurers "own" 36% of the national health insurance market.

Down to the local level, the effects of consolidation are even more dramatic. In 96% (295) of the MSA's surveyed, one insurer owns at least 30% of the combined HMO and PPO market. In 64% (200) MSA's, one insurer owns at least 50% market share. in 24% (74) MSA's one insurer has at least 70% market share. And in 5% (15) of MSA's one insurer has at least 90% market share.

Because the study was done by the AMA, the obvious focus of the study was to raise concerns about the effect that consolidation might have on the huge health plans' ability to contract with providers. The big guys have a lot of leverage in negotiating reimbursement rates, and in highly-concentrated markets, and in potentially failing to reach an agreement with these mega-insurers...on their terms...physicians fear that insurers can exercise their "monopsony power"...their purchasing power...to destroy a physician's practice.

This has led AMA to wonder why, of over 400 insurance company mergers since 1995, the U.S. Department of Justice has questioned only two.

That's certainly a legitimate concern, but it also raises another question: with giant insurers with huge market share exercising such power over provider contracting, why have consumers not benefited?

The presence of one or two very large insurers in a local community has had the effect of reducing competition among insurers for market share; in effect, a very small number of insurers in every town are passing business back and forth among themselves. Their purchasing power has in many cases given these insurers discounts on provider services which smaller competitors can't match.

The rise of these mega-plans has limited consumers' choices by limiting competition. Consolidation has enabled these plans to become very aggressive in negotiating with providers, but there's no evidence that this aggressiveness has created any benefits for purchasers. But there's plenty of evidence suggesting that the insurers, having squeezed hospitals and physicians, are enjoying significant profits for themselves and their shareholders.

If you look over the landscape...hospitals and health systems, physicians, pharmaceutical companies...the only segment of the health care system which has not undergone consolidation, or benefited from it, are the people who buy health coverage. In fact, federal and state legislation in the mid-90's actually reduced the ability of purchasers to consolidate into larger purchasing groups which might exercise a little counter-pressure on health plans to share the benefits of their purchasing power with their customers.

The inability of small businesses to form large group purchasing arrangements which could negotiate with insurers on behalf of their members appears to be one of the elements behind current legislative proposals to create large, non-profit "co-ops," which would have the charter to negotiate with insurers to push back against the rising cost of health insurance.

If it did nothing else, legislative action to reduce regulatory barriers to the formation of large health insurance purchasing co-operatives for small businesses and individuals would have great potential, over time, to re-introduce a measure of competition and administrative and marketing efficiency into the small group and individual health insurance markets. Without such measures, it's not likely that insurers will change their behavior.