Consolidation and the Transformation of Competition in Health Insurance

James C. Robinson


Health Affairs. 2004;23(6) 

In This Article

Short-Term Prospects

Consolidation of local markets, substantial barriers to new entry, few substitute products, ability to pass on increased provider costs, and a paucity of purchaser pressure are transforming competition in the health insurance industry. Further consolidation, and a further increase in entry barriers, is to be expected, as small local plans continue to sell out to the dominant carriers. The regional investor-owned health plans could be acquisition targets, offering national carriers increased enrollment and further reducing the potential for price competition. UnitedHealthcare's acquisitions of MAMSI and Oxford eliminate the most dynamic local plans in the mid-Atlantic and New York markets, respectively, perhaps foreshadowing acquisition efforts targeted at mid-size plans elsewhere. Investment bankers have developed scenarios and price estimates for the acquisition of the remaining regional plans, including HealthNet, PacifiCare, Coventry, Well-Choice, Humana, and Sierra.[20]

Unrealistic enrollment growth targets among the for-profit firms and regulatory pressures on the nonprofit plans are driving premium moderation in the short term. The investor-owned firms announced aggregate commercial enrollment targets for 2004 of 1.8 million, exceeding realistic possibilities. The commercial health insurance industry shrank by one million covered individuals in 2002 and regained only 300,000 in 2003, as the economy edged out of recession. There are fewer and fewer local health plans from which the major carriers can seize enrollment. Some observers believe that the investor-owned firms will feel forced to sustain enrollment growth even at the cost of lower premiums and profit growth, while others foresee continued pricing discipline and strong profit margins.[21]

The other potential source of premium moderation lies with the nonprofit BCBS plans, which have accumulated capital reserves far in excess of statutory requirements. In 2003 the nonprofit Blues expanded their excess capital reserves by more than 50 percent.[22] To the extent that regulators are successful in jawboning Blue Cross to lower premiums, however, the consolidation of enrollment and market share will only accelerate. The cycle of consolidation, "excess reserves," jawboning, premium moderation, and increased Blue Cross market share has already been witnessed in states as diverse as Tennessee, Pennsylvania, and Rhode Island.[23]