A Symptom; Not the Sickness: Understanding Health Insurance Consolidation

iStock_000007047153XSmall(A version of this Health Alert was submitted as testimony to the U.S. Senate Judiciary Committee.)

Chairman Lee, Ranking Member Klobuchar, thank you for the opportunity to submit this testimony on the impact of mergers in the health insurance industry. The two combinations of greatest concern are Anthem’s announced takeover of Cigna and Aetna’s announced takeover of Humana. Although tis hearing is narrowly focused on antitrust as enforced by the Department of Justice, it is also necessary to understand Obamacare as a cause of this consolidation.

One indicator regulators use to determine whether a business combination will reduce competition is whether there are significant barriers to entry in the industry. If there are, new competitors will not exploit openings created by incumbents’ consolidation. The CEOs of Anthem and Aetna have each (independently) pointed to Oscar, a new health insurer with highly pedigreed investors, as evidence that health insurance is an easy business to enter.

Oscar is indeed an interesting enterprise, which has attracted fawning coverage in the business press both for its innovation and the quality of its investors. Nevertheless, Oscar is a curious start up, because it focuses exclusively on a market – Obamacare exchanges – in which insurers are losing money.

Insurers’ negative experiences in Obamacare exchanges are somewhat due to Congress having protected taxpayers being exposed to unlimited liability for those losses. The administration had previously asserted unlimited liability for taxpayers. However, subsequent to Congressional hearings about Obamacare’s “three Rs” – risk adjustment, reinsurance, and risk corridors – at which I testified orally, Congress acted to limit taxpayers’ exposure.

Obamacare exchanges are poorly designed, so they motivate insurers to compete by offering plans attractive to healthy people, not sick people. Unfortunately (for the insurers), they largely fail to achieve this goal, disproportionately enrolling sick people instead. Because Congress finally managed to limit taxpayers’ liability for health plans’ losses in Obamacare’s exchanges, participating insurers have been losing lots of money. This is why double-digit premium hikes have been announced for 2016.  In 2017, the taxpayer-funded training wheels come off the exchanges, and participating insurers will have to cover their losses solely by moving money among themselves.

Into this minefield springs Oscar, which came into existence specifically to compete in Obamacare exchanges. In 2014, Oscar’s revenue (earned entirely through New York’s Obamacare exchange) was $56.9 million, of which it lost $27.6 million.

Some of the press around Oscar reads like we’re talking about Zappos, the online shoe store. Apparently, its online greeting of “High, we’re Oscar” and “minimalist” website count as remarkable innovation for health insurance. That is true, but does describe a path to profitability. It is important that Oscar offers free Misfit activity trackers and Amazon gift cards as rewards to beneficiaries who stay fit, because that increases the likelihood that Oscar attracts healthy, not sick, applicants. Nevertheless, its first-year experience in New York shows this is not enough.

Other new entrants include Obamacare’s subsidized CO-OPs (Consumer-Oriented and Operated Plans), about which my colleague Devon Herrick testified orally to a Congressional Committee in 2014. Dr. Herrick published subsequent research this June predicting large-scale failure of CO-OPs. This outcome is unravelling before our eyes. In September, the New York Department of Insurance ordered Health Republic Insurance, a CO-OP, to shutter due to pending insolvency. Two hundred thousand New Yorkers have lost coverage as a result.

Other new entrants include provider-based health plans, that is, health plans established by hospital systems. Like the CEOs of Anthem and Aetna, advocates of provider-based plans assert that they want to improve care co-ordination, moving beyond the Fee-For-Service (FFS) system that dominates both private insurance and Medicare. Whether the emerging crop of provider-based plans can design payment models that overcome the conflict of interest between insurance executives, hospital executives, and physicians is yet to be seen. Nevertheless, this does not change the fact that hospital systems themselves are consolidating. Therefore, it is unlikely that provider-based systems will increase the overall level of insurance competition.

Further, the whole notion of care co-ordination as a panacea for rising health costs is an unproven and very shaky hypothesis. It has been championed by business leaders for years now. While there are idiosyncratic examples of large businesses containing increases in health benefit costs through care co-ordination, there is no measurable systemic impact. The costs of group health benefits are still growing fast. The latest Kaiser Family Foundation/Health Research Education Employer Health Benefits Survey reports:

Since 2010, both the share of workers with deductibles and the size of those deductibles have increased sharply. These two trends together result in a 67 percent increase in deductibles since 2010, much faster than the rise in single premiums (24%) and about seven times the rise in workers’ wages (10%) and general inflation (9%).

The most precisely measured care co-ordination occurs in Medicare, where Accountable Care Organizations (ACOs) were launched by the Affordable Care Act (Obamacare). The Centers for Medicare & Medicare Services (CMS) have released results of Pioneer ACO’s third year of operation and 2014 results for Medicare Shared Savings Program (MSSP) ACOs which launched in 2012 through 2014.

After paying out bonuses, MSSP ACOs have saved taxpayers $383 million in 2013 and $465 million in 2014. When put in perspective, these savings are trivial. Total Medicare benefit payments amounted to $577 billion in 2013 and $597 billion in 2014. So, MSSP ACO’s savings are effectively irrelevant to current Medicare spending – less than one tenth of one percent. Further, the early entrants into the ACO program are surely the ones with “low-hanging fruit,” that is, the ones that could easiest find savings.

In conclusion, the idea that mergers of health insurers will lead to significant savings through care co-ordination is highly speculative and unlikely based on current experience. Nor is it likely that the crop of new entrants will significantly increase competition.

On the other hand, forbidding these mergers or browbeating the insurers cannot change the reality that Obamacare continues to drive up the cost of health care. Repealing and replacing it with patient-centered health reform, rather than focusing on narrow measurements of industry consolidation, is the only way to solve this problem.

Comments (17)

Trackback URL | Comments RSS Feed

  1. Barry Carol says:

    If consolidation among health insurers has any effect on premiums, it will most likely lower them, not raise them. Greater size brings greater market power in negotiating reimbursement rates with large and powerful hospital systems and physician groups which have been consolidating for years. Lower reimbursement rates will translate to lower health insurance premiums than would have otherwise prevailed at least as long as the MLR rules remain in place.

    I think the biggest reason for increasing health insurance premiums is adverse selection enabled by the combination of guaranteed issue coupled with generous subsidies for those with income of 400% of the FPL or less. In the unsubsidized world of medical underwriting that existed in most states before the ACA became law, most of these less than healthy people would have found health insurance to be either unaffordable or unavailable at any price.

    If anything, health insurer consolidation should be encouraged, not discouraged, resisted or fought.

  2. Wanda J. Jones says:

    John and Barry:

    This topic is full of opportunities sfor the ignorant to weigh in on situations in which they bring only suspicion and a limited quivser of tools to the table. Some insurers havae said that they are getting together to counter the aggregations of hospitals into larger systems, implying that the hospitals merged first. They forget the health plann mergers of the Nineties, which drove the new plans to put price pressure on hospitaals during ghe recession, which did lead them to merge, as did the need to find capital, especially in Califosrnia.

    I don’t see an automatic reduction in prices just because of a merger; instead, I think the pressure to give the shareholder a good return will have much more strength than any social benefit goal of reducing prices to consumers. Until there is a coalition of purchasers, it makes sense for insurers to keep premiums high.

    The other reason for keeping them high is the obvious one of the fantastically out of kilter features of Obamacare, each of which will simply drive up costs: guaranteed issue, community rating, and inflated benefits. There is already a corrupt marriage going on–pretending that the premium buys insurance when it buys a card that results in high deductibles; the insurer gets both the premium and the deductible before having to pay out anything. What if the public understood how corrupt that is!

    John–The worry I have about these consolidations is that they offer a tempting target to those in Washington who see that they could get to single payer through contracting with the big guys and setting the parameters of their business. It would be confiscation without having to pay anything for the privilege of controlling most of the private sector in healthcare.

    Wanda Jones

    It’s gorgeous out here in SF.

  3. Ron Greiner says:

    7/7/2010 Dr Merrill Matthews in FORBES:

    Can you say “insuragopoly”? How about “hospigopoly”? Then you better learn, because they describe how the health care system is changing under President Obama’s health care reform legislation.

    An oligopoly is when only a small number of large vendors sell a product or service. Oligopolies can occur naturally, when a company creates a great product and captures most of the market. But they are often a result of government policies that favor some players over others by restricting or eliminating competition, which often leads to higher prices and lower quality.

    That’s what will happen to health insurers, hospitals and even physicians, thanks to ObamaCare.

    Bloomberg News recently cited the investor-relations chief of WellPoint , the country’s largest health plan with 33.8 million members, as conceding that health insurers are moving toward an oligopoly. Currently, only 12 plans–from companies like UnitedHealthcare Humana , Aetna , Cigna and WellPoint–cover two-thirds of those with private health insurance, according to the article. A recent study by the American Medical Association found that in nearly half the states, two health insurers covered 70% or more of the population.


    When 2 health insurers cover 70% of the population we have a problem. I bet it helps them negotiate.

  4. Barry Carol says:

    Ron – I’m nowhere near as concerned about the consolidation among health insurers as you are. It’s a highly competitive business even as it consolidates. Typical pretax margins in the Medicare Advantage business, for example, are 5%. For managed Medicaid, it’s 3%. For the individual policy exchange business, it will likely be 5% at best and is well below that now. With all the venture capital money available these days, if someone really had a better idea about how to offer lower cost health insurance but still covers all the benefits spelled out in the ACA’s essential benefits package, they could raise the necessary capital to launch and build their business. By the way, the non-profit insurers including the Blues other than the 14 licensees owned by Anthem, Kaiser, and a few others, still control close to 40% of the health insurance market. Their overall pretax margin is in the 1%-2% range. You don’t expect them to operate at a loss, do you?

    If by innovation, you mean the ability to provide a mini-med plan that costs next to nothing for a policy that covers next to nothing or replicate the Golden Rule model that seeks to insure only the healthiest at low rates, I don’t think their disappearance from the market is any great loss.

    To address the consolidation in the hospital sector that’s been ongoing for years now, insurers need to build countervailing market power to negotiate better (lower) reimbursement rates. Between 80% and 85% of the premium dollar is spent on medical claims as I’m sure you well know. As John Fembup and I have noted numerous times, health insurance is expensive because healthcare is expensive. Find ways to reduce the cost of care through lower reimbursement rates and better medical management so patients need less care, especially hospital based care, and insurance premiums will decline or at least stabilize.

    In the retail business, there are numerous categories where two players and perhaps a weak third player compete vigorously to offer customers the best value or shopping experience. Think Wal-Mart and Target with K-Mart a weak third in discount retailing, Home Depot and Lowe’s in building supplies, CVS and Walgreens with Rite-Aid a weak third in drug retail, Staples and Office Depot (soon to merge) in office supplies, and Dollar Tree and Dollar General in cheap, convenient low end goods. Even in the supermarket space, there are rarely more than three main competitors in any given region while they operate under a lot of different banners around the country.

  5. Ron Greiner says:

    Barry, you wrote, “Golden Rule model that seeks to insure only the healthiest at low rates, I don’t think their disappearance from the market is any great loss.”

    You must be really upset with the life insurance industry then. Those people do medical underwriting when people try and get $1 million in death benefit.

    Golden Rule was the other company that did the MSA test along with TIME. The insurance by law paid 100% of inpatient, outpatient and RX after the deductible. Golden Rule might have had a so-called mini med but they also had full coverage that was medically underwritten. Today Golden Rule is called United Healthcare because Rooney sold it for $500 million in 2004 at the birth of the tax-free HSA.

    I think you are correct about the MONOPOLY of Blue Cross in the states. In IOWA Blue Cross has the State employees, city employees, county employees, school districts, Medicaid, Childrens Health Insurance Plan (CHIP) and 75% market share in the group and individual markets. They bribe the politicians for just millions and get back BILLIONS and BILLIONS. Here in Florida Blue Cross spends more on politicians than any other entity. They are also the Medicare administrator. Remember, this giant government created MONOPOLY is non-profit, lol.

  6. Barry Carol says:

    Ron – I don’t have a problem with underwriting per se as long as there is a mechanism to take care of the high risk folks who need insurance the most. Unfortunately, the high risk pools, where they existed, weren’t anywhere near up to the job because politicians were unwilling to spend the money that it would take to provide adequate subsidies.

    My problem with Golden Rule was the combination of their reputation for cherry picking the best risks and then looking hard for any possible error in the application for insurance to allow the company to claim fraud so it could deny coverage for people who happened to get sick and incur significant hospital bills.

    I don’t think people should expect to be able to wait until they get sick to apply for health insurance but I do expect insurance to work for people who have some health issues. Remember that the experts tell us that 75% of healthcare costs relate to the management of chronic disease including, by the way, virtually all of my own claims.

    I get that healthy people could buy insurance for a lot less in a medically underwritten market than they can in a guaranteed issue and / or community rated market. In every other developed country, whether they use insurers or not, premiums are effectively community rated and there is a mandate to buy insurance or pay taxes into the system.

    In Switzerland, for example, where people have to buy insurance and the only variation is that they can choose their deductible up to a relatively low limit ($2,500 per person, I think), the premium in a given canton is the same for everyone age 26 and older.

    Only in America do free market types think that health insurance premiums should reflect actuarial risk at the individual level. While I’m a free market guy on most issues, I have a different view on this one.

    • Ron Greiner says:

      Barry, let’s pretend that your daughter earns $38,000 a year and gets free health insurance from her employer but to add her healthy 35-year-old husband and 2 children onto the health insurance it costs $1,374.27 a month. She tells you that she has found a Short Term Medical (STM) program that will last till the next Open Enrollment that costs $215.56 per month with a maximum Out-Of-Pocket of $3,000 annually per person for her family. The employers plan has a $6,350 Out-Of-Pocket per person and costs so much more. She lives in an apartment that costs $1,200 a month and would really like to purchase a home someday if she can save up the money for a down payment.


      This is the cost for Seminole County Florida teachers.

      Barry, are you going to tell your daughter, “Don’t let them CHERRY PICK your family and you save $1,150 a month. We need to put a stop to this FREEDOM of choice right NOW! This is America and we don’t need no stinking FREEDOM.”

      • Ron Greiner says:

        Barry, let me add that the STM is Cherry Picking with medical underwriting. I assumed that everybody knows that but maybe some don’t.

  7. Bob Hertz says:

    Per Barry’s comment, the huge hurdle seems to be the transition in going from individual premiums to community rated premiums.
    How can you do that without a sizable number of people being made worse off?
    The ACA has made some tentative steps toward community rating, but this has raised huge anger amongst the individuals who used to have preferred rates, and, in the group area, the same anger has arisen because small group rates have been greatly compressed.

    Although I am stretching a point here, most of the single payer systems in Europe and Asia were installed after a war or economic collapse.

    • You are stretching. Single payer in Canada, Australia, Taiwan, South Korea, or the U.S. (Medicare) were not imposed after war or economic collapse. In fact, quite the opposite. There has to be a certain level of economic surplus for it to be worthwhile for politicians to promise universal health benefits.

  8. Barry Carol says:

    Ron – Bob Hertz makes the point that I would have made very well. Just about any major reform, including revenue neutral tax reform, is going to leave some people worse off than they were before. Even under the ACA, though, I think the example you cited could be easily fixed by changing the definition of “affordable” employer provided health insurance. Just because single coverage may be affordable under current rules, if you need family coverage, the definition doesn’t work for you. It would be easy to fix legislatively and then the family you cite in your example could qualify for a subsidized exchange plan. As an added fix, I would remove the 400% of FPL income eligibility cap. Nobody should have to pay more than 9.5% of pretax income for their health insurance premium (10% if it were up to me). Since healthcare costs grew more slowly than expected since at least 2009, any adverse effect these two changes might have on the CBO’s ten year federal deficit projection would be inconsequential in the scheme of things.

    I also don’t understand why you and other free market types keep trying to make the point that the ACA is a disaster because it leaves young healthy people worse off than they were in the world of medical underwriting even though it’s helped lots of others who need insurance the most and gives even healthy people the peace of mind that comes from knowing they can buy health insurance on comparatively reasonable terms if they get sick and with help from subsidies if they qualify.

  9. Bob Hertz says:

    Let me take the opportunity to offer my own reasons for opposing a pure free market in health insurance.

    My career has been insurance, of several kinds. Life, disability, and long term care insurance are basically free markets. Carriers have to prove solvency and pay valid claims, but they have very wide latitude in products and pricing. Moreover, the purchase of insurance is voluntary.

    So what are the results? Over 25% have no life insurance, (plus those who have it but let it lapse before death), 85% have no disability insurance, and 90% roughly have no LTC insurance.

    To supplement this rather dismal picture, we have Social Security giving benefits to children whose parents die, we have Social Security disability, and we have Medicaid.

    A free market in health insurance would be no different. Premiums would go up with age, and since many persons’ income declines after 65, lapses would be commonplace. Very few hospital patients would have insurance when they actually went to the hospital.
    Hospitals would go broke quickly.

    Again, I say this is as a friend of the insurance industry. But fact are facts.

  10. Ron Greiner says:

    Hold the phone Bob, you can’t just throw out your collectivist thoughts and say they are the FACTS. You have some problem with people paying more for health insurance as they age? You and Hillary think exactly the same. Hillary says, “Younger people don’t mind paying more because presumably they will be older some day too.”

    Here is some TEXAS collectivism for you:


    The High Deductible health plan has a $2,500 deductible and $6,450 maximum Out-Of-Pocket per person. Nothing is paid before the deductible. Notice how its the same price for all families regardless of age. The cost to add the family on the Fort Worth school insurance is $994 a month. But, I sell health insurance that a 30-year-old couple with a baby can purchase for $273 a month with a maximum Out-Of-Pocket of $3,000 per person (76101 zip code). The family would have a smaller Out-Of-Pocket plus save $621 a month. Maybe they could use some of this savings and purchase LIFE INSURANCE.

    Collectivism means the subjugation of the individual to a group—whether to a race, class or state does not matter. Collectivism holds that man must be chained to collective action and collective thought for the sake of what is called “the common good.” Ayn Rand

    Here at the NCPA some people still believe in Free Markets.

  11. Barry Carol says:

    Ron – The trouble with the free market in this context is that it gives young healthy people a chance to game the system. It sounds like what you want is for the young and healthy to be able to buy the cheaper policy when it saves them money but then move into the community rated system when that’s a better deal for them. People can’t have it both ways and we can’t expect to charge everyone a premium that reflects their individual actuarial risk because the premium required in many cases will be far more than all but the extremely wealthy could afford to pay.

    In Germany, between 5% and 10% of the population opts to be covered in the private insurance system which is cheaper for younger people. The rub, though, is that they can never come back into the pubic insurance system unless they can prove they are destitute. I wonder how some of these young healthy people would feel if they were told that they can buy the cheaper underwritten coverage now but they will have to agree to be subject to medical underwriting and risk being turned down completely as uninsurable in the future until they age into Medicare.

    Since you’re in the insurance business, what’s your answer for the older and sicker people who need health insurance the most? High risk pools never worked because politicians were never willing to spend the public money that it would take to make them work.

  12. Bob Hertz says:

    Ron, you are an intelligent veteran insurance agent.
    That being said, you seem to imply that the individual market was freer and more healthy before the ACA.

    I too have been an agent. I grew very tired of seeing persons declined for coverage, rated for the one condition that most troubled them, and lapsing their policies when premiums increased.

    Not to say that the ACA is a complete solution by any means. But I just do not see how you can praise the free market in the specific area of health insurance.