Health insurance consolidation on the rise

Insurer consolidation and market dominance is on the rise. A recent AMA study found that 24 states had two insurers that held 70 percent or more of the state's health plan market share.

Location, location, location: It matters when you’re buying a house, it matters when you’re starting your business, and it matters more than you might expect when you’re buying health insurance in the individual market.

In fact, your location greatly affects the selection of individual health insurance plans that are available where you live.

Case in point: Lisa Drew, a journalism professor from New York, found herself out of a job last year, but also out of luck as she attempted to maintain her health insurance coverage. In an April column for Kaiser Health News, she recounted her frustrating scramble to maintain coverage, a search that was hindered in part by her own physical address.

Drew lives in a New York county that – other than being “a paradise of farmland, lakes and waterfalls close to the cultural attractions of Ithaca” – is largely affected by insurance carrier consolidation. She is – in the words of the American Medical Association – in a “highly concentrated” insurance market. As recently as 2007, one insurer held 76 percent market share in Drew’s county.

For Drew, that meant she would have trouble finding plan options – and even other plans. In an online search, she found just one health plan for her zip code. (We searched her zip code and also found one individual plan available.)

Drew is not alone. An AMA study released in February analyzed 2009 data and found that insurer market dominance is on the rise. According to the study, 94 percent of metropolitan areas tracked were rated “highly concentrated.”

Twenty-four states had two insurers that held 70 percent or more of the state’s health plan market share. In one extreme example – Alabama – one insurer controlled roughly 90 percent of the HMO and PPO insurance market.

less competition cause for concern?

The AMA has, for years, tracked insurer market domination, and has warned that having fewer competitors in one market has “allowed health plans to force physicians in that market into take-it-or-leave-it contracts,” leading to reduced flexibility and sometimes lower income for physicians.  This year, the AMA warned that market dominance is also a threat to consumer choice, allowing plans “to give patients take-it-or-leave-it pricing.”

Merger defenders may reason that consolidation gives insurers greater efficiency and lower health costs, but AMA President J. James Rohack says the result has been the opposite. “Instead, patient premiums, deductibles and co-payments have soared without an increase in benefits in these increasingly consolidated markets.”

The AMA is not alone in cautioning against consolidation. Reform advocates charged that a lack of competition causes premiums to soar in uncompetitive markets.

During his Presidential campaign, Barack Obama pointed out that there had been 400 health care mergers over the preceding decade, and pledged to step up reviews of merger activity in an attempt to curtail it. And in 2010, the Department of Justice took action to stop a merger of the two largest providers of commercial health insurance in the Lansing area of Michigan.

The DOJ’s Antitrust Division argued that the merger would have given the new firm an 81 percent share of the commercial health insurance market, and that the domination would have resulted in higher premiums, fewer choices for consumers, and reduced quality of commercial health insurance plans.

Sabrina Corlette, research professor at Georgetown University’s Health Policy Institute, says plans that dominate a market definitely aren’t helping control health care costs. “Plans that have a large majority of the market may actually have a disincentive to keep provider costs down,” Corlette says. “A plan with 70 percent, 80 percent, 90 percent of the market doesn’t need to be aggressive in contract negotiations – they can just pass off provider costs to employers and consumers with little consequence, knowing that consumers have nowhere else to go.”

At the same time, Corlette acknowledges that carrier concentration isn’t the only threat to consumer choice. “Both plan and (health care) provider concentration are a big problem,” she says.

The health insurance industry, too, counters that it’s not carrier dominance in a market that increases premiums, and cites factors that include escalating costs of products and services, and health provider consolidation.

concentration: tough to reverse

According to the AMA, once a carrier has established a dominant presence in a market, it’s difficult for new carriers to enter that market. New insurers face a long list of barriers to market entry – and the expense of that entry is chief among them.

Sometimes, carriers will balk at the anticipated cost of establishing provider networks, says Sandy Praeger, chair of the National Association of Health Care Commissioners (NAIC) Health Insurance and Managed Care Committee. “You will see the network availability problem most often in rural areas, and to an extent in lower income areas that insurance carriers may not consider a good investment,” she says.

Carriers also look carefully at the cost of marketing their plans. If there are few agents in a given region, insurers consider that they may have to pay higher commissions to get their products in front of consumers. Carriers may also be dissuaded if they decide they can’t offer a competitive product in a market.

Naturally, new carriers also look at the stiff competition they’ll face. They know they’ll have to compete against companies with established long-term relationships.

“In some regions, like pockets in Kansas, you will find one dominant carrier willing to write statewide. Other companies are reluctant to break in,” Praeger says. “You will find pockets in North Dakota and Alabama. In California, Kaiser is very popular and many companies won’t compete.”

will health reform increase competition?

Health reform advocates – including Health Care for America Now and the Center for American Progress – predict that the Affordable Care Act will restore health insurance competition through state health insurance exchanges.

The Commonwealth Fund, which supports independent research on health care issues, also concluded in a 2010 report that one of the “major selling points” for the exchanges is their potential to widen the choice of health plans. The exchanges might “lure new entrants into concentrated markets, thereby increasing the competitiveness of the local insurance industry,” the report noted, adding that they may also make it possible for local and regional plans to compete with large carriers.

Corlette notes that one provision of the Affordable Care Act directs that each state insurance exchange offer at least two multi-state qualified health plans that would increase competition in concentrated markets. Those multi-state plans are still being ironed out by the Office of Personnel Management, which would oversee the plans.

In addition, Corlette notes, the ACA could increase competition through another provision – the Consumer Operated and Oriented (CO-OP) program –  which provides seed money for the creation of nonprofit, member-run health plans in 2013. Those plans could prove innovative with delivery systems, Corlette notes in a recent column, but it could take considerable effort to get the plans “off the ground and viable as an affordable alternative for consumers and small business owners.”

Would the increased competition hurt insurers’ business? Not necessarily. The health reform law’s subsidies for lower- and middle-income Americans and small employers who buy health insurance through the exchange – coupled with the individual mandate – would drive more customers to the exchange. And that, according to the Commonwealth Fund report, “should create an attractive market for insurers.”

Health reporter Arlene Karidis contributed to this story.

Tags: carrier consolidation, competition, health insurance companies, health insurance company, health insurance exchanges, health reform, individual mandate, patient protection and affordable care act