Consolidation and the Transformation of Competition in Health Insurance

James C. Robinson


Health Affairs. 2004;23(6) 

In This Article

Alternative Futures

Outside health care, consolidation often signals a period of prosperity and decline, as the industry is spared both the rigors and the stimulus of competition.[24] A sustained period of high prices and profits in health insurance would result in continuing shrinkage in the number of firms purchasing coverage for employees, which eventually would engender a political backlash. Conversely, the entry of new products and new competing firms could deconsolidate and revitalize the industry. Two alternative futures for commercial health insurance can be envisaged, each representing a different mix of political initiatives and market responses.

If the U.S. experiment with market-oriented health insurance is to be sustained, the industry must be subjected to renewed rivalry from new product designs and competing firms. One product design that can claim to be innovative and hence disruptive of the industry status quo is the consumer-driven health plan. If the numerous network, tax, regulatory, and customeracceptance problems facing this product can be resolved, it has the potential to attract new competitors into an otherwise consolidated industry.[25] The creation of start-ups such as Definity and the reentry of erstwhile indemnity carriers such as Great West might presage entry by banks and mutual funds with expertise in financial products and the ability to rent provider networks and disease management programs.

An alternative and equally radical product innovation, compared with the dominant insurance designs of today, would renew close contractual ties between particular insurers and physician organizations, as was attempted during the era of managed competition.[26] Coordination between the financing and delivery of care has the potential to improve quality and efficiency, but it requires creative solutions to the problems of medical group structure, capitation payment, and regulatory barriers that have plagued prepaid group practices in past years.[27]

Despite its pricing power and recent profitability, the private health insurance industry may be at the threshold of creeping control or replacement by a publicly financed and administered system. Continued growth in premiums and the number of uninsured citizens could impel an expansion of public programs such as Medicaid and the State Children's Health Insurance Program (SCHIP). The broadening of criteria for public programs could accelerate the crowding out of private insurance, as employers trim their benefits with the understanding that employees can obtain publicly subsidized coverage.

A continuing shift from employers to government as the primary sponsor of coverage need not imply the demise of the private health insurance industry, however, as evident in the role of the commercial industry in servicing TRICARE, the FEHBP, and Medicaid managed care programs. In this scenario, governmental entities will specify some product components while outsourcing to the health plans organizational specifics such as provider reimbursement, disease management, supplemental benefits, and electronic connectivity. The once-competitive insurance industry would evolve into a framework of franchise contracting between consolidated public purchasers and consolidated private insurers.

One of the great theorems of economics, and of life generally, is that unsustainable trends will not be sustained. Double-digit growth in premiums, earnings, and equity share prices are examples of unsustainable trends. In the long term, health insurance will be either revitalized by the private sector, through product innovation and competitive entry, or disciplined by the public sector, through purchasing power and regulatory requirements.