Consolidation vs. Competition

By Michael Anne Kyle

This summer, four of the five largest national health insurance companies proposed mergers – with each other. The acquisition of Cigna by Anthem and Humana by Aetna would reduce the “big five” to three. Provider groups, including the American Hospital Association and American Medical Association are alarmed, citing the potentially anticompetitive nature of these mergers.

It is true that many aspects of the health insurance market are already highly concentrated. In 2013, there were states where the individual and small group markets were dominated by companies with upwards of 70, 80, and even 90 percent market share. The Affordable Care Act introduced health insurance exchanges in an effort to stimulate competition – and it seems to be working. On the Medicare side, a new report by the Commonwealth Fund found that only one (!) of the nation’s 2,933 counties had a competitive Medicare Advantage market. Medicaid has so much going on that it is the subject for another post entirely – but worth noting here that Medicaid managed care is on the rise and projected to cover more than 75 percent of enrollees within the coming year, so the role of private insurers in Medicaid is growing rapidly.

The insurance companies argue that the upside of consolidation is increased bargaining power with providers, enabling them to negotiate better rates and value-based contracts. It’s important at this point to note that while some provider groups are decrying insurance mergers as anticompetitive, there is a tremendous amount of consolidation underway on the provider side, too. A recent analysis finds that half (150/306) of hospital referral regions (HRR) are highly concentrated, and none are highly competitive. There is evidence that concentrated markets reduce price competition, and may also have implications for quality.

In addition to horizontal integration, vertical integration among providers is also at work. In the latter case, collaboration between different types of providers (i.e. Accountable Care Organizations, bundled payments) is being directly encouraged by federal policies. These new delivery models are testing economic incentives to support better care coordination, which could have consequences, intended or not, for market concentration.

Insurers and providers are circling each other warily, seeking leverage. Both are using the same arguments to justify their respective positions – and to critique the other. Both have argued that mergers can create economies of scale that improve efficiency and reduce costs. However, whether this is true, and whether savings would be passed to consumers (or taxpayers, in the case of government programs) is a big question. It is telling that payers and providers each think consolidation of their counterparts is a bad thing. As the tension between coordination and competition plays out, we need to think critically about the tradeoffs and what economic, legal, and clinical tools we have available to optimize the care for patients.

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