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Health Insurance Markets Concentrating, Study Finds

by Precise Leads

March 21, 2019

An AMA study on health insurance consolidation finds the number of firms in each market is shrinking while prices are rising.

Health care costs have been skyrocketing while consumers, politicians and stakeholders keep  trying to figure out why. Common solutions to runaway prices include allowing insurers to sell across state lines and myriad ways to cheapen prescription costs. These may have significant impact on consumer pricing or may merely be band aid solutions. A recent study by the American Medical Association (AMA) highlights a different trend--consolidation in the health insurance industry through mergers and acquisitions.

The AMA Study

The AMA study, entitled “Competition in Health Insurance: A Comprehensive Study of U.S. Markets” is in its 17th year. The study uses data from the DRG group, the best source for data on PPO, HMOs, point-of-service (POS), public health and consumer health exchanges. The study encompasses 380 metropolitan statistical areas (MSA) spanning all 50 states.

The key metric the AMA study uses to gauge market consolidation is the Herfindahl-Hirschman Index (HHI). The HHI is the sum of the squared market shares of all firms in a market. If an MSA has an HHI over 2,500, it’s considered by the DOJ and FTC to be a “highly concentrated” market. A market with an HHI over 10,000 is considered a monopoly.

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Does Consolidation Exist?

The study concludes that there is increasing consolidation among health insurance firms across the 380 MSAs, and this has contributed to the increase in premiums above competitive levels. Here are some of the report’s key findings.

  • When combining HMO, PPO, POS and EXCH, 73% of the MSAs studied are “highly concentrated”. The average HHI for these services across all 380 MSAs in this study is 3464.

  • 100% of POS markets are “highly concentrated”, with an average HHI of 7123.

  • 96% of HMO markets are “highly concentrated”, with an average HHI of 5388.

  • 96% of the exchange markets (public and consumer) are “highly concentrated”, with an average HHI of 5388.

  • 86% of the PPOs are “highly concentrated”, with an average HHI of 4204.

How Can Consolidation Affect Prices

The AMA study points out that consolidation affects health care pricing in two ways: input markets (payments to health care providers) and output markets (insurance coverage for consumers). When a market is highly concentrated, insurance payments for services are generally lower than competitive prices, and premiums are generally higher for consumers. Consolidation of input and output markets typically coincide, according to the study.

Insurance markets and their pricing don’t exist in a vacuum. There’s evidence of rising consolidation in health care services as well. In 2016, 90% of MSAs were highly concentrated for hospitals, 65% for specialist physicians, 39% for primary care physicians. The study concludes that consolidation has led to prices above those at competitive levels, and recommends public policies that enforce competition.

The AMA study’s findings, including results for each individual MSA can be found here.

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