Consolidation and the Transformation of Competition in Health Insurance

James C. Robinson


Health Affairs. 2004;23(6) 

In This Article

Abstract and Introduction

This paper presents data on fifty state and substate insurance markets, in terms of the 2003 relative shares of the largest health plans and the antitrust index of concentration. It presents 2000-03 data on rates of growth in premiums, costs, operating earnings, returns on equity, and share prices for the nation's largest health plans (Well-Point, Anthem, United, Aetna, and CIGNA). Private insurers face renewed price and profit pressures in the short term, but long-term prospects depend on the emergence of new products and new competitors in an increasingly consolidated industry.

The contemporary imagery of health care consumerism evokes a transfer of decision-making rights and responsibilities from the insurer to the individual and the consequent withering away of the managed care organization. Yet health plans are growing larger, not smaller, consolidating local markets and reaching into new geographic regions, products, and customer segments. The commercial health insurance market in many states is dominated by two to three carriers. The same set of corporate logos now extends across once-distinct niches, from insured small-group coverage to self-insured corporate accounts and from Medicaid managed care to pharmaceutical, behavioral, and other specialty health benefits. Prices and profits have been at historic highs, as insurers have refused to sacrifice margins for enrollment volume. Premiums are moderating in the short term, as investor-owned insurers pursue growth in an already consolidated industry and state regulators demand pricing rollbacks from nonprofit Blue Cross and Blue Shield (BCBS) plans.

This paper analyzes the consolidation of the commercial insurance industry, taking into consideration rivalry among incumbent firms, barriers to entry by firms from other sectors, paucity of substitute products, ability to pass through cost increases from suppliers, and ineffective pushback from purchasers. Data are presented on the concentration of market shares across both health maintenance organizations (HMOs) and preferred provider organizations (PPOs) and across both insured and self-insured employer funding arrangements. The economic success of the industry is highlighted through data on premiums, costs, earnings, and share prices for the sector's leading firms. The industry faces one of two futures: rejuvenation by the private sector or domestication by the public sector.