The federal government is currently debating whether the big six health insurance companies in the U.S. will soon become the big four. Aetna and Humana have announced plans to merge, as have Anthem and Cigna. The American Hospital Association and the American Medical Association strongly oppose the mergers, saying they will reduce competition in consumer markets.
Meanwhile, health care provider groups continue to consolidate. Small hospitals either get swallowed up by larger ones or risk going out of business. The federal government even seems to be encouraging provider consolidation, by establishing incentives for them to form accountable care organizations, or ACOs.
Standard economic theory holds that when firms gain too much market power, prices rise. Will that be the consequence of health care consolidation?
The short answer is: No one knows, because so much depends on the relative power of payers and providers in individual markets.
If consolidation was limited to providers, prices would rise (absent government intervention). For example, prices for total knee replacements have been shown to be higher in markets where orthopedic surgeons have bonded together in larger organizations. This is the finding of a study led by Eric Sun from Stanford University. Sun collected information on physician fees for this procedure, from a database of health insurance claims. He also figured out how competitive orthopedic markets are in different parts of the country. In some markets, patients can choose from a wide range of independent orthopedic surgeons. In more concentrated markets, their choices will be more limited, due to the existence of large orthopedic groups that account for a high proportion of local services. Patients in those more concentrated markets will face, on average, a $200 increase in the fee their surgeons charge for such services.
The price of health care in the U.S. is determined in part by negotiations between payers and providers. When a large group of orthopedic surgeons commands a significant percent of business in a given area, they are in a good position to bargain for higher fees from local insurers.
What happens, then, when insurers gain market share? In part, they are in a position to negotiate for lower provider fees. That is why health insurance mergers could potentially reduce health care prices.
Why do I say “could” instead of “will?” For several reasons. First, health insurance is still a local business. The complicated market power of Aetna/Humana will still vary dramatically from market to market. Where I live in North Carolina, for instance, the combined company will still be dwarfed by BlueCross BlueShield of North Carolina.
Second, if providers consolidate faster or more effectively than payers, they will still hold the upper hand in negotiating prices. I don’t pretend to have any idea of how this particular horse race is going to play out.
Third, there will probably be legal challenges to consolidation on both the payer and provider side. I don’t pretend to even pretend to know the outcome of these legal actions.
Fourth, when payers consolidate, they not only gain more power over providers, but, also more power over enrollees. Large, dominant insurance companies might be able to get away with charging higher premiums for their insurance plans. Their ability to do this will depend in part on how sensitive potential enrollees are to the price of insurance plans, and to how aggressive local regulators are about limiting premium hikes.
Some people call economics the dismal science. I have no idea what name they would give to the even messier world of health care economics. But that messiness is not the fault of health care economists, who simply happen to be studying one of the most fascinating and complex parts of our economy. I look forward to seeing what they learn about merger mania and health care prices.
Meanwhile, those of you hoping to know what the future holds? Probably best for you to turn away from health care pricing and focus on something more predictable. Like earthquakes.
Peter Ubel is a physician and behavioral scientist who blogs at his self-titled site, Peter Ubel and can be reached on Twitter @PeterUbel. He is the author of Critical Decisions: How You and Your Doctor Can Make the Right Medical Choices Together. This article originally appeared in Forbes.
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