When Americans buy health insurance they typically find they have fewer and fewer choices. In some states, such as Alabama, a single insurance company has a near total monopoly. In half of all metro areas, just two health insurers divide two-thirds of the market.
This high degree of concentration has been building for years. A study published in the American Economics Review in 2012 found that the share of U.S. communities in which health insurance markets had become “highly concentrated” (using the standard deployed by Federal anti-trust regulators) increased from 68 in 1998 to 99 percent in 2006. The same study concluded that this increase in concentration had caused a seven percentage point increase in premiums over the period.
Today, monopolization extends to all forms of health insurance, from policies purchased by individuals on “Obamacare” exchanges to group plans purchased by employers and Medicare Advantage plans purchased by retirees. The Kaiser Family Foundation estimates that by the end of 2017, 22 percent of people purchasing health care insurance on the exchanges created by the Affordable Care Act will find that only a single company is offering policies in their community. Another 21 percent will find that the exchanges in their community carved up by a duopoly of just two insurers.
Meanwhile, the latest available data show that the percentage of the Medicare Advantage market controlled by the top four largest insurers increased from 48 to 61 percent nationwide between 2007 and 2015. For individual and group policies, the increase in the market share of the top four firms when went from 74 percent in 2006 to 83 percent in 2014.
Some observers defend health insurer mergers by arguing that they help to restrain the cost of health care. When a health insurer has lots of market power in a community it is usually able to negotiate for lower prices with local health care providers, including hospitals, doctors, and labs. Providers know that if a locally dominant insurer doesn’t include them in its network they will lose many or even most of their patients, and so these providers agree to discounts. Just as Wal-Mart is able to squeeze its suppliers for price concessions, so to can large health insurers, using what economists call the power of monopsony.
But there is no guarantee that insurers will pass along these savings to their customers and indeed, as health insurance markets become increasingly monopolized, they have little or no reason to do so. Thus, for example, when Aetna and Prudential merged in 1999, a subsequent study showed that this did indeed lead to less income for hospitals and doctors in communities where the combined company gained high market share, but also to an increase in premiums.
Today, most of the cost of health insurance derives from the price and volume of medical services, but it also reflects the increasing monopoly rents of consolidating insurance companies. These monopoly rents are reflected in the fact that the cost of health insurance continues to grow faster than the cost of medical treatments.
They are also reflected in the fact that the CEOs the eight largest publicly traded health insurers are among the most highly compensated executives in the world, taking home a combined $171.8 million in total compensation in 2016. That is equivalent to the cost of providing approximately 60,000 people with the most popular health insurance plan offered on the HealthCare.gov federal marketplace that year.
Monopolistic health insurers also abuse their market power by insisting that hospitals sign contracts with so-called “most favored nation” clauses under which hospitals must promise to never give equal or more favorable prices to any other health care plan. In some instances, a dominant insurer will collude with a hospital to fix prices high but insist that the hospital charge other health care plans still more. These market manipulations, which are outlawed in some states but are not per se illegal under federal law, can have many other anti-competitive effects including placing barriers to entry for new insurance companies and facilitating cartel pricing.
Another effect of increasing concentration among insurers is increasing monopoly among providers. Hospitals are merging and absorbing doctors’ practices at a rapid pace for many reasons, but these include the need to match the growing market power of insurers in contract negotiations. Insurers in turn, see the growing monopoly power of providers in many markets as a reason why they must defensively combine into ever more giant entities, setting off a cycle of mergers leading to an ever less competitive health care sector marked by ever rising medical price inflation.
Unlike with transportation, communications, retailing, and the industrial sectors of the economy, the United States does not have a long tradition of using anti-trust laws and other competition policies to insure competition in health insurance markets. One reason is that health insurance is a comparatively new phenomenon. As recently as the early 1940s, only 9 percent of the population had health insurance, and it mostly came in the form of prepaid medical plans organized by non-profits, trade, and fraternal organizations. Within the health care sector, anti-trust prosecutions instead tended to focus in this era on collusion among doctors and hospitals. In a case that drew much attention at the time, for example, the Department of Justice sued the American Medical Association in 1938 for conspiring to undermine the creation of what we today would call a health maintenance organization, which the AMA feared would undermine doctors’ autonomy and income.
By contrast, federal competition policy actually encouraged cooperation among insurance companies. In 1945, for example, Congress passed the McCarran-Ferguson Act, which offered insurers partial exemptions from anti-trust laws by allowing them to share data on claims and losses. By the 1970s, the private health insurance industry had grown and consolidated enormously, becoming the dominant means of financing American health care, but by then anti-trust enforcement was under deep ideological attack and was in retreat across the board.
Only in recent years have regulators begun to scrutinize the high degree of concentration that has emerged in private market for health insurance. Late in the Obama administration, for example, the Department of Justice filed lawsuits to block mega merger deals between Aetna and Humana and Anthem and Cigna.
Yet the U.S. still lacks a comprehensive policy for balancing the rising market power of insurers with the rapid consolidation and integration that is occurring among doctors, hospitals and the health care sector as a whole. In many cases, large corporate hospital chains are acquiring their own health insurance companies, and vice a versa. On current course both the health care finance system and the health care delivery system are becoming akin to two giant Sumo wresters who rather than competing with each other, agree to combine their powers to crush all smaller players, whether they be patients or the few remaining independent doctors, hospitals and clinics.