Market Concentration and Premiums

It is fairly undisputed that both health insurance and provider (especially hospital) markets have become more concentrated.  The impact of this concentration on provider prices and on insurance premiums is heavily debated and probably highly interactive, with a four-way matrix of relative hospital and insurer concentration leading to different outcomes in pricing.  Research published in the Journal of Health Economics attempts to untangle these effects.  (Health Econ. Article)   The researchers looked at employer-sponsored insurance and used a Kaiser foundation database to secure premium information over the years 2006 to 2011.  They  also constructed HHI measures of market concentration for the health insurance and hospital markets  using standard databases on insurers and hospitals.  Only fully-insured plans were used to measure premiums, but a plan’s share of both insured and self-funded business was used to determine relative bargaining power with providers.  Looking at the HHI for health plans and hospitals, there was heterogeneity in markets.  Some markets had insurers with more concentration, and presumably more bargaining leverage, than hospitals; some markets with hospital systems with more concentration and bargaining leverage, and some with relatively equal power.  In regard to fully-insured employer coverage, almost 100% of the geographic markets are either moderately or heavily concentrated (keep that in mind in light of the latest proposed large health plan consolidations).  In regard to bargaining with hospitals, there are a significant number of markets, about 27%, that are unconcentrated from a health plan perspective.  As we would expect, greater health plan concentration is associated both with higher premiums for fully-insured plans and lower prices paid to hospitals.  (It is a separate question whether consumers see the benefits of those lower prices.   The higher premiums would suggest they don’t, but MLR requirements may ameliorate some of that effect.)  Markets which have greater levels of hospital concentration have higher premiums as well.  The bottom line is that the best situation for buyers of health coverage appears to be to have both a competitive plan and a competitive hospital market; that likely results in the lowest premiums.  Unfortunately, what we have in many, if not most, markets is an oligopoly of both plans and hospitals and in those markets the parties likely quickly realize that the best outcome is for the hospitals to get paid more and the plans just pass that on to their customers in the form of marked-up, higher premiums.