Consolidation’s impact on health insurance premiums

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June 22, 2015 by Tony Novak

It was inevitable: the wave of cries by businesses, consumers, and industry groups now fearing that the proposed mergers in the health insurance field will reduce competition and drive up insurance premium rates.  This assertion that consolidation within the health insurance industry will drive up insurance premium prices is simply illogical and unsupported by the bulk of the evidence. Yet we read plenty of otherwise apparently intelligent people repeating this false assertion (see, for example, the comments published in today’s Wall Street Journal).

Takeover target Aetna has been among those contending for at least the past four decades that consolidation in the health insurance industry would better help control health care cost inflation. Most of the available data seems to support this position and this week’s intense media coverage of the proposed mergers does not attack this core economic principle. The few published sources linking higher insurance premiums to fewer insurers (like the work of former FTC official Leemore Dafny) do not establish a cause and effect relationship. This association is more likely explained by the fact that markets under stress (mostly stress created by legal climate) tend to draw fewer free market competitors. It is fairly easy to show the link between (#1) regulatory climate and (#2) the number of health insurance competitors as well as the link between (#1) level of regulation and the (#3) cost premium. Research like Dafny’s that attempts to directly link #2 with #3 without establishing a cause and effect relationship is misleading and a classic example of “lying with statistics”.

The largest component driving health insurance premium increases, as regulated by state and federal law, is an increase in the underlying cost of medical care. All of the available economic information supports a conclusion that consolidation in the insurance field may help slow down the rate of medical cost inflation.

Conversely, the portion of our medical insurance premiums that may be subject to bloating  (again, because insurance premium increases are highly regulated by both federal and state law) due to oligopic market forces is mathematically small and probably statistically insignificant.

The belief that competition spurs lower insurance premiums is likely just one of many economic fictions promoted by PPACA backers. But the converse assertion – the assertion that is called into question now – that consolidation will drive up premiums is both illogical and unsupported by the evidence.

Perhaps the health insurance industry needs a catchy new public relations slogan to convey this reality to the public. The drafter certainly won’t be me; for the best I can come up with is “Insurance companies don’t drive up premiums, medical costs drive up premiums”.

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