Insurance Market Competitiveness

The aspect of health care costs that consumers are most familiar with is the cost of their health insurance, which largely reflects underlying provider unit costs and utilization of services.  But health insurance premiums can also be influenced by the level of competition in local markets.  The Kaiser Family Foundation reports on how competitive individual and small group markets are.  Large groups are generally viewed as better able to fend for themselves, whether by purchasing insurance or by self-insuring.  The individual and small group markets have historically been more volatile and seen higher rate increases.   (Kaiser Report)   The report analyzed competition by the market share of the largest insurer, the number of insurers with more than a 5% market share and the Herfindahl-Hirschman Index, which is typically used in antitrust reviews.

In the individual market, 30 states were dominated by a single insurance company.  Most states also had few insurers with more than a 5% market share.  In 45 states the HHI indicates that the market very concentrated, and only one state has a competitive individual market.  The small group market shows similar dynamics, with the median market share of the biggest insurer in each state being 51%.  In twenty six states, the largest insurer had more than half the market.  Once again, few states have more than 3 or 4 plans with even a 5% market share.  By the HHI, 39 states are basically uncompetitive.  The one quibble about the analysis is that since a small group is generally defined as 100 or less employees, some of the those groups may have a self-funded potential.

The report notes that dominant insurers may have some benefits, such as being able to negotiate lower rates with providers.  That is not what happens in health care; when an insurer has a large market share and can charge higher rates, it tends to pay higher rates to providers, and in turn those providers who charge more tend to have higher internal costs of production.  This is particularly true because almost all of the dominant insurers in the individual or small group market are Blue Cross/Blue Shield plans, which are either controlled by or have a historically close relationship with providers.  Having more competitive health insurance markets is important, but one underused way to achieve that is by removing barriers to entry and increasing transparency for consumers.