True Competition a Myth in the Private Health Insurance Marketplace, Part 1

You don't have to search far to find people rhapsodizing about the virtues of competition [1]. Nowadays, "competition" is the hot topic of health care reform. Free-market fundamentalists claim [2] competition in the health insurance market is critical. And, the implementation of a new public health insurance option, as President Obama proposes, will undermine it.

But the simple fact is that there is very little competition in the health care marketplace. The government has allowed health insurance companies and providers to do pretty much as they will. And what they have willed is to merge and buy each other out until there are just a few dominant insurance companies and provider groups in each market.

As James C. Robinson pointed out [3] (PDF) at the end of 2004, in 16 states the dominant health insurance company accounts for at least 50 percent of private insurance enrollment, while in 40 states the top three health insurance companies account for between 60 and 100 percent of the market. He gives some background behind this phenomenon:

"The emergence of managed care in the 1980s was accompanied by the creation of hundreds of health insurance plans—mostly health maintenance organizations (HMOs)—which forced the incumbent indemnity insurers to reduce their costs or lose their customers. The subsequent senescence of managed care has been accompanied by an equally remarkable shrinkage in the number of competing health plans, as small firms sold out to their larger rivals and as even some of the industry's biggest names disappeared in a wave of mergers and acquisitions. In the past year, for example, UnitedHealthcare has acquired Oxford Health Plans, and Anthem has announced the acquisition of WellPoint, creating megaplans with twenty-two million and twenty-eight million enrollees, respectively."

And the consolidation fever has continued, as proclaimed by the headline "Health Insurance Sector Sees Further Consolidation. [4]" The article explains how consolidation continued to be a major theme in the health insurance sector in 2007:

"While UnitedHealth Group Inc.'s proposed acquisition of Sierra Health Services Inc. is the merger and acquisition 'highlight' so far, according to analysts, the majority of deals are smaller transactions involving companies that provide specialty health care products and services or have attractive regional operations.

"Minnetonka, Minn.-based UnitedHealth and Sierra officials vow to move forward with UnitedHealth's planned purchase of Las Vegas-based Sierra despite strong opposition by consumer groups, a local union, several Nevada politicians and provider organizations such as the Chicago-based American Medical Association."

This is borne out by the American Medical Association's 2007 report "Competition in health insurance: A comprehensive study of U.S. markets [5]," (PDF) which found that in the majority of areas it looked at, a single health insurer dominates the market, thus undermining competition. According to the report:

"Over the five years since the AMA's first study, the country's largest health insurers have continued to pursue aggressive acquisition strategies. The largest insurer, WellPoint Inc. (formed from the merger of Anthem Inc. and WellPoint Health Networks), has acquired 11 health insurers since 2000. The second-largest health insurer, UnitedHealth Group (United) has also acquired 11 health insurers since 2000.

"To put this in perspective, in 2000, the two largest health insurers, Aetna and United, had a total membership of 32 million lives. As a result of mergers and acquisitions since 2000, the top two insurers today, WellPoint and United, each have memberships, respectively, of 34 million and 33 million, totaling more than 67 million covered lives. Together, WellPoint and United control 36 percent of the national market for commercial health insurance. In 2004 and 2005, 28 mergers valued at a total of $53.8 billion were completed or announced, which exceeded the value of all the deals completed in the previous eight years. (Corporate Research Group, The Managed Care M&A Explosion, 2005).

"Observers predict that large health insurers will continue to acquire their smaller competitors. WellPoint's new chief executive officer stated in February that mergers will be one of the key drivers of WellPoint's future growth. Further, in March, United announced its proposed acquisition of Sierra Health Services, the largest health plan in Nevada. The AMA has asked the U.S. Department of Justice (DOJ) to block the merger, because if the merger is approved United will control 56 percent of the Nevada marketplace (compared with its current 11 percent market share)."

But that's just the free market at work, you might say. Doesn't a bigger, stronger company mean better health benefits for its members? Apparently not, as the AMA report goes on to explain:

"While large health insurers have posted very healthy profits since 2000, premiums for consumers have increased without a corresponding increase in benefits. In fact, during the same time period, consumers have faced increased deductibles, co-payments and co-insurance. This has effectively reduced the scope of their health benefits coverage." [Emphasis added]

The AMA is, of course, concerned with the effects of insurer consolidation on physicians. "Physicians are the least-consolidated component in the health care industry," says the AMA report. "Most are in practices with four or fewer physicians and simply have no negotiating power with health insurance behemoths."

On the other end of the spectrum are the hospital conglomerates that now dominate many markets. Your friendly neighborhood community hospital has most likely been bought out by a large hospital chain. The Urban Institute reports [6] (PDF) that U.S. hospitals have undergone rapid consolidation since 1990, in part as a response to the growing market power of insurers and managed care plans. Often hospitals have allied with physician group practices to further strengthen their bargaining power.

A study conducted by leading health care researchers [7] observed "some powerful hospitals have been able to use their leverage to block innovations that, arguably, would make markets more price-competitive."

Another study of multiple markets [8] found that "most consolidating hospitals raise prices by more than the median price increase in their markets." The price increases for inpatient care have been estimated to range anywhere from five percent to forty percent or more.

The Boston Globe uncovered what happens when the irresistible force of an insurance monopoly meets the immovable object of a provider conglomerate in its December 2008 expose, "A Handshake that Made Healthcare History [9]." The article explains how the largest provider group in Massachusetts and the state's largest health insurer made a deal that raised health care costs across the state:

"It was the gentleman's agreement that accelerated a health cost crisis.

"And Dr. Samuel O. Thier, chief executive of Partners HealthCare, and William C. Van Faasen, chief executive of Blue Cross Blue Shield of Massachusetts, weren't about to put it in writing.

"Thier's lawyers cautioned that a written agreement between the state's biggest hospital company and its biggest health insurer that would make insurance more expensive statewide might raise legal questions about anticompetitive behavior, according to officials directly involved in the talks.

"And so, in May 2000, the two simply shook hands on this: Van Faasen would give Partners doctors and hospitals the biggest insurance payment increase since Massachusetts General and Brigham and Women's hospitals agreed to join forces in 1993.

"In return, Thier would protect Blue Cross from Van Faasen's biggest fear: that Partners would allow other insurers to pay less. Those who helped broker the deal say Thier promised he would push for the same or bigger payment increases for everything from X-rays to brain surgery from Van Faasen's competition, ensuring that all major insurers would face tens of millions in cost increases. Blue Cross called it a 'market covenant.'

"The deal, never before made public, marked the beginning of a period of rapid escalation in Massachusetts insurance prices, a Spotlight Team investigation has found, as Partners repeatedly used its clout to get rate increases and other hospitals tried to keep up. Individual insurance premiums have risen 8.9 percent a year ever since the 'market covenant,' state figures show, more than twice the annual rise in the late 1990s."

The way to inject true competition into our health care system is to give people a choice of a public health insurance plan. Only a public health insurance plan can break the quasi-monopoly premium pricing power insurance companies have in most areas, and the high provider fees set by large provider groups that dominate most markets.

As the Urban Institute noted in its report "Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform? [6]" (PDF):

"The second reason for having the government play a role as a competing plan is because insurer and hospital markets are increasingly dominated by large insurers and provider systems. The increased concentration has made it difficult for the nation to reap the benefits usually associated with competitive markets. The consolidation in the insurance market has not led to strong insurers who are willing or able to negotiate effectively with dominant hospital systems. As a result, countervailing power on the demand side may be needed to control costs." [Emphasis added]

Jacob Hacker, Professor of Political Science, U.C. Berkeley and Co-Director, Center for Health, Economic & Family Security, agrees. In his report "The Case for Public Plan Choice in National Health Reform: Key To Cost Control and Quality Coverage [10]," (PDF) Dr. Hacker explains:

"Without public plan choice, on the other hand, we will continue to lack strong institutional mechanisms to rein in costs and drive value down the road, putting the broader goals of reform and our nation's public and private budgets at risk. Although expanding insurance and upgrading inadequate coverage will require substantial up-front investments, any viable proposal for affordable quality health care for all must be able to contain long-run health costs. Ensuring that mechanisms for effective cost restraint are embodied in national health reform is essential—and a key argument for public-private competition." [Emphasis added]