In U.S. Health Insurance Market, Consolidation Of Insurers Is Increasing Premiums

The U.S. health insurance industry relies heavily on private markets, but these markets are highly concentrated and are growing more so over time. In a new analysis, researchers document concentration across commercial, Medicare Advantage, and Medicaid markets, examining how asymmetric information—particularly adverse selection—interacts with market power to shape premiums, plan designs, and consumer welfare. They conclude that consolidation of insurers boosts premiums, and they call for regulation and antitrust oversight.

The analysis, by researchers at Carnegie Mellon University and Northwestern University, is published as an NBER Working Paper.

“The U.S. health insurance system will work only as well as the health insurance markets that underpin it,” says Martin Gaynor, emeritus professor of economics and public policy at Carnegie Mellon’s Heinz College, who coauthored the analysis with Amanda Starc, professor of strategy at Northwestern University’s Kellogg School of Management.

“While much research has examined competition and consolidation, major gaps remain, especially regarding insurer acquisitions of providers and the theoretical and empirical effects of these new industry structures,” adds Gaynor, who is also former director of the Bureau of Economics at the U.S. Federal Trade Commission and former special advisor to the Assistant Attorney General for antitrust at the U.S. Department of Justice.

About 238 million Americans—78 percent of those with health insurance and 70 percent of the total population—get their health insurance from a private health insurance company. Most receive insurance through their employer, but increasingly, Americans are receiving private insurance that is publicly subsidized (e.g., through the Medicare Advantage program). Like many U.S. industries and for a variety of reasons, health insurance has become more concentrated in the last decades.

In their analysis, Gaynor and Starc discuss how antitrust enforcement, risk adjustment, regulation, and informational interventions shape competition and consumer welfare in these markets. They argue that the challenges of policy support for a competitive health care market go beyond straightforward questions of a concentrated market.

Health insurance, along with the health care industry as a whole, is beset by issues of imperfect information, particularly adverse selection, the note. For insurance companies, these issues create incentives to behave in ways that undercut the performance of markets (e.g., by structuring insurance policies that tend to attract healthier-than-average enrollees and finding ways to stint on care in ways that may be difficult to observe).

As concentration rises in commercial and government-sponsored markets, the resulting dynamics of competition in the context of imperfect information are critical for premiums, coverage, plan choices, and ultimately consumer welfare. The authors suggest that much remains to be done in formulating “rules of the road” to guide competition in health insurance markets.

Offering a wealth of examples, they also describe government-subsidized provision of private health insurance (e.g., Medicare, Medicaid), including how geographic differences affect the availability of plans and consumer enrollment, and fact that the consolidation and the resulting market concentration in Medicare Advantage has drawn the attention of antitrust enforcers. And they touch on the effects of vertical consolidation, how asymmetric information contributes to health insurance concentration, and how insurance companies respond to information asymmetries.

The authors suggest that U.S. health insurance markets are characterized by market power from concentration and consolidation, and by information asymmetries that cause adverse selection. These features interact to produce to shape premiums, the design of plans, the availability of coverage, and in the end, the welfare of consumers. Given these interactions, the authors recommend that rules of the road include effective regulation and antitrust oversight.

“Health insurance in the United States is provided mainly through markets, and how competition functions in health insurance markets is a key factor in determining how well the U.S. system of health care works,” explains Starc. “But these markets don’t work as well as they could or should. The substantial market imperfections in this sector, both due to asymmetric information and due to market power, require significant monitoring and oversight to improve market performance.”

The authors also suggest that having a single entity responsible for monitoring, oversight, and policy implementation in health insurance markets—with separate entities for each state—might be beneficial.