Here's What Health Insurance Consolidation Could Mean For Your Premiums

If you like high prices, then you probably hate marketplace competition. Nothing disrupts the normal relationship between supply and demand better than a monopoly. If you doubt that, look at your local cable bill.

But in healthcare, competition doesn’t necessarily affect prices the way it does in other parts of the marketplace. Consider recent debates about health insurance consolidation. Two giant insurers, Humana and Aetna , are planning to merge, perhaps to keep up with two other companies, Anthem and Cigna , which have similar intentions. These proposed mergers have sparked controversy about whether insurance consolidation will lead to higher premiums. Standard economic theory suggests that such consolidation should raise premiums, because insurers will face less competition for customers and therefore can charge more for their products. But insurers claim the consolidation should lower prices. Why? Because these larger payers might have greater negotiating power with hospitals and physician groups. In healthcare, you see, insurance premiums in part reflect the price of medical care. When the cost of physician fees or surgical procedures rise, so too must insurance premiums. If insurance companies can strike tougher bargains with healthcare providers, if they can use their market clout to hold down healthcare prices, then they could theoretically be able to hold down the cost of monthly premiums.

So will insurance consolidation cause premiums to rise or fall? There is no way to know for sure. Healthcare markets are quite complex. Plus, states have the power to regulate insurers, which might limit premium hikes.

But there is some evidence out there that should cause real concern for how these mergers might affect premium prices. A team of researchers analyzed premiums on the Obamacare health insurance exchanges. These are the private insurance marketplaces created by the Affordable Care Act for people to purchase insurance when they can’t get it through an employer and don’t qualify for Medicare or Medicaid. The researchers looked at premium prices from 2014 and 2015, and tested whether those prices went up or down as insurers exited or entered marketplaces. In some localities, you see, a consumer might have had four insurers competing for her business in 2014 and only two in 2015. In other localities, consumers might have seen the number of insurers increase over that same time. The researchers took advantage of this variation in competition to see how prices changed as insurers exited and entered markets.

They discovered that the addition of one insurer to a market was associated with a 2% drop in premiums. Here is picture of that result. (Ignore the bars and focus on the lines, which move from left to right showing a drop in prices as the number of insurers in a given marketplace increases.)

A word of caution here: This study shows correlation, not causation! There are differences across marketplaces that these researchers cannot account for, which might explain their results. There’s more things going on here than just insurers entering or exiting markets. Something could be happening that causes insurers to flock to one market while abandoning another, and those other things might influence premium prices separate from insurer competition.

Nevertheless, this finding stands as another piece of evidence suggesting that insurer consolidation could lead to premium increases. It is consistent with earlier research from the Congressional Budget Office showing that when Medicare created a drug benefit, the prices people paid for such coverage were lower in areas with greater insurance competition.

I would love to see insurers use their leverage to help curb healthcare spending. And perhaps insurance consolidation will promote those efforts. But there is not much use in curbing healthcare spending if those savings aren’t passed on to consumers. If health insurers want to consolidate, they should commit to reducing health insurance premiums.