Opinion

Health plan consolidation: Bigger isn't better

It's time to re-examine a system that's allowed health plans to build overwhelming power in local markets.

Posted June 5, 2006.

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When health plans have merged, they've said that a bigger insurance company would be a better insurance company. And that has been true -- if you're a health plan executive. For the rest of the health care continuum -- not so much.

Megamergers have helped health plans cement dominant positions in more and more metropolitan areas and have pushed them to record profits and given massive payouts to their top executives. Consider one beneficiary of consolidation whom United's Dr. McGuire didn't list in his comment above -- himself, currently sitting on a staggering $1 billion-plus in stock options.

Meanwhile, plans have been known to use their monopsony positions -- a marketplace imbalance in favor of a powerful purchaser -- to squeeze reimbursement to and create bureaucratic hassles for physicians and others. At the same time, plans continually have raised premiums for consumers while typically offering no increase in benefits. "It is clear that patients -- the ultimate consumers of health care -- are not benefiting from these mergers," writes the AMA Private Sector Advocacy group in its latest study of health plan market domination.

That study -- "Competition in Health Insurance: A Comprehensive Study of U.S. Markets, 2005 Edition" -- shows that health plan market domination is greater than ever. In 279 out of 294 metropolitan areas studied, two health plans carry more than half of the HMO/PPO business, thus meeting the Justice Dept.'s definition of a highly concentrated market. The other 15 are merely "concentrated" -- a condition that, even in the Justice Dept.'s own view, should be enough for a second look before approving a merger.

Alas, a reason for this dominant condition has been the Justice Dept.'s approval of every single one of the more than 400 health plan mergers over the last dozen years. In only two cases has it ever required a newly merged plan to divest of operations because it indeed held unquestioned monopsony power (usually defined as 30% or more of physician practice revenue) in certain markets.

The record profits enjoyed by health plans would make one think that there's a great opportunity for new plans to jump in and take advantage of the ill will physicians, hospitals, patients and, increasingly, employers feel toward large health plans.

But barriers to entry are high.

For starters: Meeting state regulatory requirements, building a physician network and developing sufficient business to spread risk. If entry to a market were easy, then the WellPoints and Uniteds would start from scratch in a new market, rather than buy their way in. Even substantial plans will leave markets, such as Aetna has done, when faced with another plan's monopsony power.

So if new plans can't break in, it's time to look at the legal landscape that allows health plan consolidation. Now is as good a time as any -- the largest plans say they're taking a break from acquisitions because they need time to swallow the ones they've already made. As the AMA report points out, if this consolidation is not corrected, "the imbalances in the marketplace will have serious negative long-term consequences for the health care system."

The AMA and the physicians it represents were among the first to see that when health plans talk taking over another plan, what they often mean is taking over a market.

It's time government regulators start seeing the same thing -- and doing something about it.

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External links

"Competition in Health Insurance: A Comprehensive Study of U.S. Markets," American Medical Association, 2005 (link)

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