Obamacare's Unnatural Monopoly

The Supreme Court’s decision not to strike down insurance subsidies in federal exchanges signaled that the Affordable Care Act will remain in place until a new president signs reforms into law. The law is in need of reform, and a new development in the provision of health insurance may raise prices even further. America may see a wave of consolidation in the health insurance industry as the largest health insurers consider merging into even larger mega-companies. 

Anthem (the second-largest insurer in the country) is attempting a takeover of Cigna (the fifth largest), and rumors are sprouting up that UnitedHealth (the largest insurer) may try to acquire Aetna (the third largest). According to Fortune Magazine’s Shawn Tully, this do-si-do of high-profile mergers could send the combined UnitedHealth-Aetna institution to fifth place on the Fortune 500 list, with total revenues greater than those of Apple and Ford.

While mergers can sometimes help companies take advantage of each other’s strengths and save weaker companies from bankruptcy, they can also dry up competitive pressures. Fewer companies providing a product means fewer alternatives to which consumers can turn when they are dissatisfied. This often results in a decrease in product quality and an increase in prices. 

A 2012 paper by economists Leemore Dafny (Northwestern University), Mark Duggan (University of Pennsylvania), and Subramaniam Ramanarayanan (University of California at Los Angeles) estimated that the consolidation of the health insurance industry from 1998 to 2006 increased premiums by an average of seven percentage points. 

In the case of health-insurance, the ACA has created several incentives for big insurers to combine. Regulations in the law mandate that insurance plans cover certain “essential health benefits” that really are not essential to everyone, such as maternity care and mental health coverage. While these mandates have the obvious effect of increasing premiums—more coverage means higher costs—they also create anticompetitive forces for insurance companies. Rather than allowing consumers to shop around for a plan that meets their specific health needs, the ACA mandates a standard set of features for everyone.

This requirement makes it more difficult for different insurance companies to compete, because they are locked into providing a certain level of coverage. With nothing different to offer their customers, it makes sense for large health insurance companies to merge, since they will not have the flexibility to offer new, innovative insurance plans to draw customers away from their competitors, and thus can only increase revenues by joining together. After all, why would people leave their insurers if the alternatives have nothing new to offer?

Another anticompetitive feature of the ACA is the requirement that insurers may spend no more than 20 percent of patient premiums on administrative expenses and other non-medical costs. While one would expect this provision to reduce wasteful spending, it has the unintended consequence of encouraging health insurers to merge in order to spread administrative costs over a larger customer pool. This strategy may benefit the companies’ balance sheets, but it makes the industry less competitive overall.

Under the ACA, the government must approve large premium increases on the exchanges before premiums can rise. This, in effect, makes insurers accountable to regulators rather than to their customers. To gain more sway with regulators, insurers will want to gain a larger share of the enrollee pool. In 2013, the most recent year for which data is available, the largest insurer in the median state controlled 55 percent of the individual insurance market. The two largest insurers combined controlled 78 percent, and the three largest 88 percent. Most states are only a few high-profile mergers away from a near-total monopoly in their insurance markets.