The Case for Bigger Health Insurers

Humana CEO Bruce Broussard and Aetna CEO Mark Bertolini in 2013.

Photographer: Andrew Harrer/Bloomberg

A wave of consolidation is sweeping through the U.S. health-insurance industry. Most recently, Aetna has offered to buy Humana, and more such mergers are on the way. That must be bad news for consumers, right? Not necessarily.

As a rule, less competition is bad, because it means higher prices -- and that's the last thing U.S. health care needs. But health care is a complicated business. The likely effect of these mergers on the cost of insurance isn't so clear-cut. The Justice Department, in deciding whether to oppose these deals, will have to weigh a variety of factors. It's possible, for once, that less competition might do consumers a favor.

QuickTake Obamacare, Assessed

The crucial complication in health insurance is that consolidation in a different part of the health-care industry is already well advanced. For good reason, the Affordable Care Act encouraged sellers of health-care services -- doctors, hospitals and other providers -- to link up and coordinate their offerings. Better coordination, according to the designers' reasoning, was the key to reducing unnecessary care and rewarding providers for good outcomes rather than the number of services supplied.

That reasoning was correct -- but the result has been an increase in the size of provider networks, as hospitals merge with physician groups and each other. This encourages coordinated care, with teams of providers working together to prevent and manage diseases at every level of treatment, but it has a side effect. Health-care networks have gained market power to raise their charges to insurers; in turn, the insurers pass those increases on to their customers.

Containing costs is part of what Obamacare promised, and the need is pressing. From 1999 to 2014, average annual premiums for employer-sponsored family health coverage tripled, from $5,791 to $16,834. If you're wondering why you haven't gotten much of a raise recently, the high and rising price of U.S. health-care services -- in some cases, multiples of what the same services cost in other developed countries -- is a big part of the answer.

Coordinated care is an essential cost reducer, but increased bargaining power on the provider side of the industry threatens to undo some of the benefit. In most developed countries, responsibility for controlling prices falls on the government; in the U.S., with its aversion to such interference, the job has long fallen to private insurers. For this to work, insurers need to bargain with providers on equal terms. Within limits, consolidation in the insurance industry can serve this purpose.

You might ask: What's to stop bigger and more powerful insurance companies simply pocketing the benefits of lower medical costs, rather than passing them on to consumers?

Obamacare has a provision that helps. The law says that large health plans must spend at least 85 percent of the money they take in from premiums on health-care expenses. If an insurer's medical spending falls short, it must refund the difference to customers. Most big insurers have medical spending that hovers around that level, so if increased market power drives down prices, premiums should follow and customers should benefit.

Additional safeguards would also make sense. For instance, state regulators should be more willing to challenge price rises. They ought to have made more use of this power already; the need would be all the greater if the number of insurers were to fall. California's insurance commissioner hasn't been shy. Others should follow his example.

Case by case, a balance has to be struck -- enough consolidation among insurers to drive down costs at the provider level, but not so much as to put buyers of insurance at a disadvantage. The Justice Department is rightly tasked to prevent mergers that "substantially lessen competition," but it has discretion in applying that threshold to particular markets and in weighing whether a merger can also create new efficiencies.

Most state insurance markets are a long way from being dangerously concentrated. In most cases, therefore, striking the right balance will mean letting these mergers happen. Sometimes, a little less competition can be good for consumers. 

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.