Health Policy$ense

Who Has The Most To Lose From Health Insurance Mergers?

cross-posted with the Field Clinic

In recent weeks, two sets of already huge health insurers—Aetna and Humana, Cigna and Anthem—have announced plans to combine. And more mergers may be in the works.  Should the rest of us fear being trampled when these behemoths connect? The answer to that question, as with almost all questions in health economics, is “it all depends.”

How you might be affected as a consumer depends on how you get your health insurance. Most people get it the same way I do, as part of their compensation from a large employer. These firms almost all “self-insure,” which means they do not pay premiums to an insurer but instead pay a combination of claim costs (so the employer, not the insurer, bears the risk of uncertain claims) and an administrative fee paid to a firm that manages the coverage. That firm often is an insurer (like Aetna or, in the case my plan, Independence Blue Cross), but it can also be a consulting firm, or the employer can handle the administration itself. 

We lucky people have little to fear from these combinations. Even if the mergers give insurers more market power to raise premiums, our plans will not be affected because the employers do not actually pay premiums. The worst that can happen is that there might be less competition among companies that supply administrative services, but that market includes firms that are not insurance companies, so it is likely to remain competitive.

The next largest group of Americans with private health insurance is those who work for smaller firms. Most of these companies do pay real premiums for real insurance because they are too small to self-insure. Their workers would be more vulnerable to premium increases that could result from mergers. However, that will not occur in all markets. It did happen in Texas where commercial insurers dominated, but will not happen in others, such as Philadelphia, the dominant insurer is a non-profit Blue Cross plan that is not involved in this wave of mergers. 

We may hope that insurers selling to small employers will not respond to decreases in competition by trying to fatten their bottom lines. However, we will have to be vigilant. And those who are insured by Blue Cross plans that have already been acquired by for-profit firms, like Anthem, do have cause to be worried. But even here, if things get too bad, medium sized employers can switch to self-insurance if they are willing to absorb a little more risk.

Who else is in the private market? Two major groups: people who buy insurance as individuals largely through the Obamacare exchanges, and seniors who elect the private Medicare Advantage option rather than traditional Medicare. 

The most vulnerable group, in my view, is those buying individual coverage through the exchanges—currently about 5% of the population. The Affordable Care Act had a goal of reducing market power and confusion in the individual market and fostering competition. These mergers may represent a counter-revolution by insurers as they shrink the number of other firms with which they must compete. The fairly generous subsidies paid to most people who buy exchange insurance has allowed the individual market to become modestly profitable for insurers, and mergers may up that profitability.

Somewhat surprisingly, the most profitable part of the private insurance market is the Medicare Advantage program.  Perhaps it is not so surprising, when we consider that the subsidy rate for those who choose this option is close to 90%. Heavy involvement in this market made Humana attractive to its suitors, and it is the market where reduction in choices caused by the mergers may be greatest. 

However, there are two reasons why even buyers in these markets may not have much to fear. A Medicare Advantage customer who sees their “zero premium” private plan suddenly display a premium can switch to traditional Medicare.  This is a public option—often not especially attractive because of higher cost sharing but still a safe haven if private firms try to abuse their market power.

There is no such protection for buyers of exchange plans, but this market does share with Medicare Advantage another protection—a rule setting a lower bound on the insurer’s “medical loss ratio,” the percentage of premiums it must pay out as medical claims. This is 80% for individual insurance and 85% for Medicare Advantage, and it means that the amount the insurer can keep as profits and administrative cost cannot exceed 15-20% of the premium. If the insurer makes too much money, it must pay a refund. 

So there are protections against excessive premium increases resulting from insurance company mergers. However, I would not be a good economist if I were not worried about more subtle adverse effects that mergers might produce. For example, merged insurers can raise their premiums, and therefore profits, not by cutting administrative costs but by letting medical costs rise. In this way, ironically, the combination of Obamacare regulation and mergers that are possibly provoked by Obamcare may lead not only to higher insurance premiums but also to higher health care costs.

It is enough to make you nostalgic for the good old days when there were many insurers that did not do much but pay claims. At least they did not raise the fear of market power. But, alas, American health care moved beyond that stage long ago.