For a while now, five big players — Anthem, Humana, UnitedHealth Group, Aetna, and Cigna — have dominated the U.S. health insurance market. But it looks like that number will soon drop to three: A few weeks ago, Aetna inked a deal to buy Humana, and this week saw the final touches put on a merger between Anthem and Cigna.
The latter deal isn't finished yet, and may face scrutiny from antitrust regulators. But if it goes through, the new health insurance giant would cover 53 million people in the employer and commercial insurance markets, as well as its work with Medicare and Medicaid. The Aetna-Humana merger would serve a combined population of 33 million, while UnitedHealth Group serves 45 million people.
This raises a chain of political and economic questions. What's causing the consolidation? Will it raise prices? And more broadly, is it ultimately bad for Americans and their ability to get affordable and effective health care?
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Answering the first question is tricky because two big shocks — the Great Recession and the passage of ObamaCare — recently hit the health care industry in rapid succession. And the effects of each are difficult to disaggregate. A big economic collapse reduces the number of paying customers, in health insurance as much as elsewhere, so business models have to retool to accommodate. Mergers take advantage of economies of scale, serving more customers with less overhead.
Meanwhile, hospitals are subject to the same forces, and have also been merging. When it comes to determining the price of health care, hospitals and providers sit on the opposite side of the bargaining table from insurers. If one side goes through a round of mergers and consolidations, that can spur the other side to do the same, so that it can maintain the same bargaining clout that comes with size.
There's reason to suspect that changes wrought by ObamaCare are encouraging these moves as well. The health care reform law vastly expanded the number of Americans on Medicaid, and that program's reimbursement rates for providers are pretty low compared to private insurers in the employer-based markets or on ObamaCare’s exchanges. The law also set up a long-term reduction in the reimbursement rates Medicare pays, which will ramp up in the coming years. The logic of both those forces also encourages mergers on the provider side, since they increase the customer base, but at a relatively low rate of revenue per customer.
The surge in hospital mergers actually began in 2010, after the recession and before ObamaCare took effect — though it's not as if providers didn't know what passage of the law foretold.
On the insurance side, ObamaCare introduced regulations that require insurers to pump less of their revenue into profits, and more of it into actually buying care for the customers. It also established a baseline set of benefits that all insurance packages are required to provide. That, too, introduced new potential costs that mergers can help deal with.
As a result, ObamaCare's critics have pounced on it for driving the insurance and hospital markets towards a smaller number of bigger players, thus driving up premiums. Several studies have suggested a correlation between hospital and insurance consolidation on the one hand, and premium hikes on the other. And the latest round of requests for premium increases by insurers in a number of states certainly include a few eye-watering numbers. (Though the requests have yet to be approved by state regulators.)
Yet the causal arrow is not so simple. There's no intrinsic reason why an increasing Medicaid population or tightened Medicare reimbursements rates should drive up costs elsewhere. They can, but they don't have to.
For one thing, as mentioned above, if insurers and providers maintain roughly equal bargaining clout, they can keep one another in check. For another, like any other market, the operating costs for insurers and providers are not fixed. They're established by the give and take of competition, as another recent study demonstrated. The market for health insurance in America is still broken up on a state-by-state basis: If both Aetna and Humana operate in the same state, it's possible their merger could drive up premiums in that state. But if only one of them operates there, it's not clear why it would matter.
There's also a certain intellectual dishonesty to the criticisms of ObamaCare.
One way to slow down the mergers on the hospital side would be to increase Medicaid and Medicare's reimbursement rates. But most of ObamaCare's naysayers are, of course, conservatives, and are ferociously opposed to letting those programs' costs increase. (Never mind that the U.S. government actually has far more room to tax and borrow, without hurting the economy, than critics allow for.)
There's also something silly about decrying ObamaCare's regulatory minimums. At some point, as a product's costs get low enough, they can no longer be attributed to providers finding better ways to supply a quality product — instead, it's simply because the product itself is bad. And when a product crosses the line into "bad" is a moral and social question rather than a purely empirical one. For instance, requiring apartment developers to include good plumbing and basic sanitation in any dwelling they build drives up the price of housing to some degree. But taking away those regulations would be a pretty terrible way to make housing more affordable.
A better goal would be to tweak ObamaCare's structure to maximize competition. Certainly haggling over the requirements for minimum benefits could be part of that. But arguably the biggest problem is the fracturing of the insurance market along state lines. An underappreciated clause in ObamaCare allows states to come together under one health insurance exchange, and pushing states to take advantage of it would increase the scope and number of players in any given exchange, making competition more robust.
The final thing to remember here is that there's a rather unique moral component bound up with health care markets. In the market for video game consoles like the Wii-U, for example, we let prices bring demand in line with supply. And it's not considered a national scandal if some people get priced out of the Wii-U market, because no one thinks having a Wii-U is a basic human need or right. Not so with health care: there's a baseline of supply we think everyone should be able to get. Market competition can help alleviate the cost of providing that supply, if properly harnessed, but only so much. One way or another, that cost will have to be paid: either through direct government spending (like Medicare and Medicaid) or through government subsidies and regulatory structuring of private insurance markets.
Simply maximizing the freedom of insurers to provide cheaper products isn't going to solve anything, except by jettisoning the moral commitment entirely.
