Will Health Insurer Mergers Produce Lower Premiums?

There are five dominant national health insurance companies in the United States: UnitedHealth Group, Anthem, Cigna, Aetna, and Humana. Pending mergers among four of them could lead to a new “big three” that would cover more than 130 million members (two in five Americans). During recent congressional hearings, health plan CEOs argued that consolidation would benefit consumers by leading to greater efficiency and lower prices.

Here are the facts.

FACT: Historically, health plan mergers have led to higher premiums.

While it is difficult to predict how a particular market area in California would be affected by these potential mergers, research has shown that market consolidation actually leads to higher premiums. For example, a study found that the 1999 Aetna-Prudential merger led to premium rates increasing 7% faster than prevailing rate growth in less-consolidated markets over an eight-year period (L. Dafny, M. Duggan, S. Ramanarayanan, 2012). And a case study found the 2008 UnitedHealth-Sierra Health Services merger resulted in a 13.7% premium increase in Nevada over increases seen in markets without mergers (J. R. Guardado, D. W. Emmons, C. K. Kane, 2013 [PDF]).

FACT: Greater competition, as measured by the number of plans in a market, results in lower premiums.

Recent analyses of health plan participation in the Affordable Care Act marketplaces confirm that more competition leads to lower premiums. One study concluded that adding one new plan offering in a geographic market would lower premiums by more than 5%. The addition of every available plan in a region lowered rates by more than 11%. But health plans face significant barriers to entry in heavily consolidated markets with large entrenched plans (L. Dafny, J. Gruber, C. Ody, 2014).

FACT: Markets with few health plans and highly concentrated provider networks have incentives to work cooperatively to keep premiums high.

Many regional markets in the US already face significant health insurer concentration. In fact, 80% of the regional markets in 37 states have three or fewer health insurance companies (Government Accountability Office, December 2014). In such states there are many examples of unwritten détentes between insurers and providers that discourage vigorous negotiating for lower prices. This dynamic keeps provider reimbursements and health premiums high and leads to a phenomenon recently described by St. Louis University law professor Thomas L. Greaney as the “Sumo Wrestler Theory Fallacy,” wherein cooperation between plans and providers leads to a “handshake rather than an honest wrestling match” (Thomas L. Greaney, September 2015).

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