A recent flurry of acquisitive activity has taken place in the health insurance market. Aetna has purchased Humana, Anthem has purchased Cigna. Ten years ago, over 15 insurers controlled half of all Americans privately insured. Today, four insurers control 65 percent of the 170 million people who are privately insured.
Congress is reviewing these acquisitions and has called a number of CEOs from these large insurers to testify. As well, health economists and consumer advocates have been called to testify. Insurers claim that the reasons for consolidation have to do with economies of scale and with an ability to negotiate effectively on the enrollees’ behalf for better health care pricing.
But are these better prices being passed on to the consumer in the form of lower premiums? Overall, is the consolidation good for the consumer as it relates to choice?
One of main reasons for insurer consolidation has to do with the McCarran-Ferguson Act, which exempts insurers from federal antitrust laws and places the evaluation of health insurance mergers with state health insurance regulators. These agencies often hire health insurance executives. Doesn’t that result in a situation where the fox is guarding the hen house?
Several health economists, including Wharton Assistant Professor Amanda Starc and Health Care Management Professor Robert J. Town, have published research on the negative effect of insurer consolidations on pricing. They found that “monopoly” insurance markets result in higher overall pricing for consumers—upward of 30 percent compared with a competitive landscape. This had occurred in Medigap insurance.
Further, out-of-pocket expenses for health care—deductibles and copays—have been rising faster than overall growth in health care spending in employer-sponsored health insurance. This is an indication that insurers and employers are passing more of the cost of health care to their employees. In other words, out-of-pocket spending is outpacing insurers’ medical spending with pricing, not technology, being the driver.
Other economists, such as professors Brad Herring from Johns Hopkins and Lee Dafny from Northwestern, find that among health insurance monopolies in fully insured markets, premiums are higher. They also find that where insurance companies are overly profitable over long periods, premiums also rise disproportionately.
Other issues relate to product and service offerings. When monopolistic insurers negotiate with health care providers, insurers can indeed drive down pricing potentially to the detriment of quality of care and fewer choices for patients. In these circumstances, substituting nurses, who are paid less, for physicians can also occur. A situation may arise where dominant or monopolistic insurers force physicians and hospitals to cut costs so far that they begin to degrade care and service to the detriment of consumers.
These issues are not really being discussed as actively as the positive effects of insurer concentration, but they should be.