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Consolidation

PERSPECTIVE

Is There Evidence That Recent Consolidation In The Health Insurance Industry Has Adversely Affected Premiums?

Abstract

 
James Robinson suggests that recent consolidation in the insurance market has been a cause of higher health insurance prices (premiums). Although the recent consolidation among health insurers and rising premiums are indisputable, it is unlikely that consolidation has had any adverse effect on premiums nationwide, and Robinson provides no data that suggest otherwise. Specifically, he does not present data showing an increase in concentration in any relevant market during the past few years, let alone any resulting increase in premiums. Health insurance consolidation in certain local markets could adversely affect premiums, but it seems clear that it is not a major national antitrust issue.

Local nature of insurance markets. Geographic markets for many products are national, or even international, in scope. Cars from Asia and Europe, for example, compete effectively with cars manufactured in the United States. However, health insurance markets are local, because they are derivative of the provider networks used by the plan. In a state the size of Rhode Island, the geographic market could be the entire state, but in larger states, such as Pennsylvania, the sale of health insurance products in Pittsburgh does nothing for local employers in Philadelphia or even Harrisburg.

In antitrust terms, a relevant market is the collection of firms that are good substitutes for each other. The existence of good substitutes is what defeats attempts to increase price, reduce output, or exclude competitors: "The purpose in determining the appropriate geographic market is to identify the relevant competitors who could constrain the [exercise of] market power."² Market power has been defined as "the ability of a single seller to raise price and restrict output."³ Typically, we estimate the likelihood that a transaction will create, or has created, market power by calculating the increase in market share, or its first cousin: the increase in the Herfindahl-Hirschman Index (HHI), a market concentration measure used by the federal antitrust enforcement agencies. Of course, as explained by Judge Easterbrook, the prominent jurist and antitrust scholar, "Market share is just a way of estimating market power, which is the ultimate consideration. When there are better ways to estimate market power, the court should use them."⁴

Effects on market power. The federal merger guidelines identify two ways in which mergers can create or increase market power: coordinated conduct and unilateral conduct.⁵ In markets with only a few firms, coordinated conduct can involve tacit collusion by market participants, acting individually, if all participants recognize that it is in their best interest to raise prices above competitive levels. Unilateral conduct is a concern where, as a result of a merger, the merged entity has the power to increase price above competitive levels regardless of the responses of other participants.⁶

In health insurance markets, however, tacit collusion may be difficult because specific pricing information is not usually published and is not typically shared by market participants. Unilateral increases in price may be difficult because insurers do not have capacity constraints in the same sense as manufacturers do, and, except perhaps for certain Blue Cross plans, there is little or no brand loyalty.

Barriers to entry. Any calculation of market power also requires the identification of barriers to entry, because without such barriers, market share reflects only current sales, not power over price.⁷ Barriers to entry are "factors (such as certain regulatory requirements) that prevent new rivals from timely responding to an increase in price above the competitive level."⁸ The federal government has defined timely entry as entry that "can be achieved within two years from initial planning to significant market impact."⁹

In some cases, the development of an adequate provider network can be a barrier to the entry of additional insurers into a market. However, the creation of an adequate network is not a major barrier where commercially attractive, provider networks may be rented.¹⁰

Robinson points out that HHIs in most states are high, but he fails to calculate any increase in any HHI caused by consolidation. Yet according to the merger guidelines, "mergers producing an increase in the HHI of less than 50 points, even in highly concentrated markets post-merger, are unlikely to have adverse competitive consequences and ordinarily require no further analysis."¹¹ The omission is important because, even assuming that statewide market shares accurately reflect the shares of the firms in actual (smaller) geographic markets, most recent consolidation has involved nothing more than the substitution of one owner for another, with little increase in concentration, as the Department of Justice (DOJ) has recognized.

Recent DOJ decisions. Indeed, even the recent proposed merger of WellPoint and Anthem was not viewed as an important antitrust issue by the DOJ: "The facts did not support a conclusion that this merger will give a combined Anthem/WellPoint market or monopsony power in any market in which they compete. WellPoint’s share in the markets in which they overlap is very small, and these companies are not particularly close competitors."¹² Even more recently, the DOJ elected not to challenge United’s acquisition of Oxford Health Plans. It explained:

First, harm from coordinated interaction appears unlikely. The wide variety of health insurance products offered, the differentiation among product lines, the diversity of...customers, and the different methodologies for pricing to customers, would make it difficult for health insurers to coordinate on price or other dimensions of competition. Second, harm from unilateral effects is also unlikely. Oxford/United will have a number of viable competitors post-merger. In addition, United and Oxford are not close substitutes for one another for many customers.¹³

The only health insurance merger ever challenged by the DOJ involved Aetna’s acquisition of Prudential, and there the government challenged the transaction only in two limited geographic areas: the metropolitan statistical areas in and around Houston and Dallas, Texas.¹⁴

Of course, the best evidence of market power is the existence of anticompetitive effects. Proof of actual detrimental effects obviates the need for an inquiry into market power, "which is but a surrogate for detrimental effects."¹⁵ Judge Posner, another prominent jurist and antitrust scholar, has lamented the failure to use actual pricing data in merger cases: "It is regrettable that antitrust cases are decided on the basis of theoretical guesses as to what particular market-structure characteristics portend for competition...We would like to see more effort put into studying the actual effect of concentration on price."¹⁶

Need for data-based analysis. Thus, the best evidence that consolidation in health insurance markets is likely to harm consumers would be studies assessing whether premiums are higher in more highly concentrated markets. Unfortunately, Robinson has not undertaken that analysis. As previously noted, actual pricing data are not readily available from public sources—in most areas, premiums charged to large groups (typically, larger than fifty people) vary depending on the group’s experience and the proposals offered by competitors. Insurers understandably do not make their data publicly available. Still, designing a study would not be impossible if national employers were willing to make their data available to researchers under appropriate protections and safeguards. The results, identifying the correlation, if any, between concentration levels and premiums, could be published without reference to specific plans or specific prices, thereby avoiding the contentious issues that would make cooperation less likely.

Whatever the outcome, the results of a carefully designed study could provide useful information. However, those results could not establish that health insurance consolidation is a major national antitrust issue. It is not.

Editor's Notes

Top Editor's Notes NOTES

 
William Kopit (WKOPIT{at}ebglaw.com) is an attorney at Epstein, Becker, and Green in Washington, D.C., where he has tried health care antitrust cases and written about health care antitrust issues extensively.

NOTES

Top Editor's Notes NOTES

 

1. J.C. Robinson, "Consolidation and the Transformation of Competition in Health Insurance," Health Affairs 23, no. 6 (2004): 11–24.[Abstract/Free Full Text]
2. United States v. Rockford Mem’l Corp., 717 F. Supp. 1251, 1261 (N.D. Ill. 1989), aff’d, 898 F.2d 1278 (7th Cir. 1990), cert denied, 198 U.S. 920 (1990).
3. Fortner Enters. v. U.S. Steel Corp., 394 U.S. 495, 503 (1969).
4. Ball Mem’l Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1336 (7th Cir. 1986).
5. U.S. Department of Justice and U.S. Federal Trade Commission, Horizontal Merger Guidelines, 1997, www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html (31 August 2004), Secs. 2.1 and 2.2.
6. Ibid.
7. Ball Mem’l Hosp., Inc., 784 F.2d at 1336.
8. United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir. 2001).
9. DOJ and FTC, Horizontal Merger Guidelines, Sec. 3.2.
10. FTC and DOJ, Improving Health Care: A Dose of Competition, July 2004, www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf (31 August 2004), chap. 6 at 9–10.
11. DOJ and FTC, Horizontal Merger Guidelines, sec. 1.51(c).
12. DOJ, "Antitrust Division Statement on the Closing of Its Investigation of Anthem, Inc.’s Acquisition of WellPoint Health Networks, Inc." (Washington: DOJ, 9 March 2004).
13. DOJ, "Antitrust Division Statement on the Closing of Its Investigation of UnitedHealth Group’s Acquisition of Oxford Health Plans" (Washington: DOJ, 20 July 2004).
14. Complaint, United States v. Aetna Inc., N0.3-99CV 1398-H, par. 19 and 20 (N.D. Tex. June 21, 1999); and Final Consent Order, United States v. Aetna Inc., No.3-99CV 1398-H (N.D. Tex. Dec. 7, 1999).
15. Federal Trade Comm’n v. Indiana Fed’n of Dentists, 476 U.S. 447, 460–61 (1986), quoting P. Areeda, Antitrust Law, vol. 7, par. 1511, p. 429 (1986).
16. United States v. Rockford Mem’l Corp., 898 F.2d 1278, 1286 (7th Cir. 1990) (citing W.G. Kopit and R.W. McCann, "Toward a Definitive Antitrust Standard for Nonprofit Hospital Mergers," Journal of Health Politics, Policy and Law 13, no. 4 [1988]: 635, 645–646, and note 30).

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