Entry to Health Insurance Markets: Do Consumers Have Better Choices?

In determining whether a particular market is competitive, economists will often study entry into the market. Are new players entering, and due to this entry, are incumbent market competitors forced to adapt and offer innovative products and services to effectively compete? Within health insurance markets, the entry issue has been raised. In fact, the CEOs of both Anthem and Aetna, companies hoping to merge with Cigna and Humana respectively, have suggested that the health insurance markets are “robust” with competition due to new, competitive entry. But, is that really the case?

As a starting point, health insurance market have long been highly concentrated and dominated by incumbent insurers. The mergers of Anthem-Cigna and Aetna-Humana would eliminate two of the five national insurers leading to further concentration and potentially anticompetitive overlaps. Entry by other insurers could offset the competitive harms. But, such entry must be “sufficient to deter or counteract competitive effects of concern.”

The Department of Justice has long been wary of entry defenses in health insurance merger matters, noting that they should be viewed with “skepticism.” Why? Because, it is nearly impossible for new insurers to enter a market and compete with dominant incumbents. Serving as a sort of “Catch-22,” a new insurer needs both “a large provider network to attract customers, but they also need a number of customers to obtain sufficient price discounts from providers to be competitive with incumbents.” Without large insurance pool of customers and a sufficient provider network, a new insurer cannot survive.

But has insurance entry improve since the passage of the Affordable Care Act? In some instances, yes. The ACA has expanded the interest of insurer entry through the Insurance Exchanges, has created new Consumer Operated and Oriented Plans (CO-OPs), and helped expand the usage of vertically integrated provider networks, more simply known as hospital run insurance plans. However, a closer examination of the facts indicate that entry in these areas has been limited in its success and has not offset any of the incumbent insurer dominance.

While initially consumers saw a plethora of insurance options on the Exchanges, for 2016, 40 percent of all consumers on the Exchanges will have access to just two insurers. The majority of CO-OPs, which were supposed to provide a consumer friendly insurance product in every state, have failed and are going bankrupt. Lastly, while some hospitals and providers have offered and continue to offer insurance products, studies show they are unable to expand “beyond their core markets.” None of this entry has change the fact the average state has a single insurer with controlling 55 percent of the market.

As a result, new entry by outside forces has not been sufficient to deter or counteract competitive concerns within the health insurance landscape. Moreover, the elimination of two national insurers could further harm potential entry, as the merging parties are the most likely and capable to enter new insurance markets and compete. The results of all this failed entry combined with increased consolidation is that customer satisfaction with health insurance is at a 10-year low. The evidence is clear, health insurance competition is not robust and new entry is unlikely to aid consumers in the event of massive health insurance mergers.

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