Health insurance competition matters

Consumers have never benefited from a health insurer merger, so why would they this time?  This should be the key question as lawmakers on the Senate and House Judiciary Committees prepare to review two major health insurance mergers – Aetna’s acquisition of Humana and Anthem’s acquisition of Cigna.

So will this time be different? All facts point to no.

{mosads}Health insurance markets are already tremendously concentrated. Research by the American Medical Association shows that high levels of concentration characterize 70 percent of markets in metropolitan areas across the nation, findings that are much in line with studies done by the Government Accountability Office. At the moment, five large health insurers vie for dominance: Aetna, Anthem, Cigna, Humana and UnitedHealth. This number would go down to only three if the mergers were allowed.

Unlike other markets competition is fragile at best.  There is little entry and the shares of the 5 largest firms stay stable. Among other things, high startup costs guarantee that dominant firms remain unchallenged. In other words, if mergers reduce competition, as they tend to do, no one can expect market forces to correct competitive harm.

When it comes to health insurance, you don’t need a Ph.D. in economics to recognize the importance of competition. Higher concentration clearly means higher premiums, a fact recognized by The New York Times editorial board in its thoughtful editorial against the mergers.

Higher premiums seem to be a given if these companies are allowed to merge.  Studies of previous health insurance mergers leave no doubt that consolidation leads to higher premiums. Although the parties claim the markets are competitive recent proposed  big premium hikes belie that assertion.  These likely increases in costs have led consumer groups and unions to raise serious objections to these mergers.

These competition problems have been well recognized on both sides of the aisle.  The Affordable Care Act aimed to foster competition in markets that were previously lacking in transparency and choice for consumers. In this regard, the Affordable Care Act is quite similar to Republican health care plans, which also hinge on fierce competition in health insurance markets across the nation. That is to say, regardless of one’s opinion of the Affordable Care Act, these mergers matter.

Is there a benefit from this consolidation? The president and CEO of Anthem, Joseph Swedish, has declared that a merger with Cigna would lead to an “acceleration of innovative and affordable health and protection benefits solutions” to his millions of customers. That claim does not stand up to scrutiny.

No study has yet to show consumers sharing the gains from increased efficiencies through health insurance mergers.  Moreover most of the efficiencies are simply best practices one or another firm has adopted.  There is no reason why any of these efficiencies can not be achieved simply by firms rolling up their sleeves and developing a better approach.

If allowed to proceed, these mergers are likely to have the same result as the airline industry.  Regulators allowed the airline industry to consolidate, which resulted in long lines, deteriorating service and higher fares. One can only imagine what will occur if the same happens in health insurance.  The airline industry is also hardly a hotbed of innovation, which is desperately needed in the healthcare industry.

Lawmakers should not welcome the insurance company’s hollow declarations that no harm will likely arise. Instead, they should push the Department of Justice to take an aggressive approach to this merger mania. 

Some may suggest that the mergers can be resolved with simple divestitures, but they would be wrong. Divestitures constitute an imperfect means of resolving imperfect competition. In many locales, for instance, Anthem and Cigna represent the only insurers and thus no divestment is possible. Further complicating matters is the fact that few plans have networks as broad and affordable as Anthem, Cigna, Aetna and Humana. This means that finding plans to take over the divested assets will be extremely difficult.

If lawmakers should remember one thing, it is that Americans can’t get health care without well-functioning health insurance markets. Legislators should scrutinize these mergers to guarantee that Americans receive the care they need at a reasonable price.

Balto is a former policy director of the Federal Trade Commission, attorney adviser to Chairman Robert Pitofsky and antitrust lawyer at the U.S. Department of Justice.


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