Exploring the Impact of Hospital-Market Concentration on Price Competition in Insurance Markets

Grant Description: The researchers explored the extent to which insurance concentration and its balance with hospital concentration affect health insurance premiums. Their analysis incorporated plan-level data for private employer-based insurance premiums from the KFF-HRET employer survey, as well as a measure of insurance market concentration from InterStudy data and a measure of hospital market concentration using data from CMS’s Medicare Cost Reports. The researchers hypothesized that premiums will, all else equal, be lower in markets in which insurers have relatively stronger bargaining power with hospitals. The goal of this project was to shed light on the role of the relative bargaining power of insurers and hospitals as a factor when considering the functioning of health insurance markets, including premium levels.

Policy Summary: The US private health insurance industry is highly concentrated, and employer-sponsored health insurance premiums are high and rising rapidly; recent research and policy attention has been focused on the possible link between these two phenomena. Examples of such attention include an American Hospital Association letter and accompanying report to the US Department of Justice calling for increased scrutiny and retrospective analysis of health insurance mergers¹,  as well as the introduction of legislation in the US House of Representatives intended to “restore the application of the Federal antitrust laws to the business of health insurance and protect competition and consumers.”²  However, much of this attention fails to account for a unique feature of the US health insurance industry: while market power may enable insurers to attain higher profit margins on the premiums they charge to employers, it may also result in stronger bargaining leverage with hospitals and thus lower negotiated payment rates, which could, in turn, be passed on to employers in the form of relatively lower premiums.

We analyze the relationship between employer-sponsored health insurance premiums and the level of concentration in local insurer and hospital markets, constructing two unique measures of insurance concentration representing the market in which insurance is sold to employers distinctly from that in which insurers bargain with hospitals. Using a nationally-representative dataset of employer-sponsored health insurance premiums from 2006-2011, we indeed find evidence of these offsetting effects of the level of concentration in insurance markets on health insurance premiums. We find that, all else equal, premiums are higher for plans sold in markets with higher levels of concentration in the market in which insurance is sold to employers and lower in markets with higher levels of concentration in the market in which insurers bargain with hospitals. We also find that hospital market concentration is positively related with health insurance premiums. Overall, compared to a market with competitive insurers and hospitals, a market with concentrated insurers and hospitals has 6.2% higher premiums, while a market with competitive insurers and concentrated hospitals has 8.3% higher premiums.

These findings have important policy implications related to the implementation of the major private market reform provisions included in the Affordable Care Act and for the enforcement of antitrust policy in the hospital merger context. Regarding the ACA, the creation of state-based health insurance exchanges is expected to create a competitive marketplace for the sale of insurance policies to individuals and small businesses. Our findings suggest that, while this enhanced competition may indeed work to mitigate insurer market power in selling policies, it may not actually produce the intended result of lower health insurance premiums, particularly if provider markets become more concentrated at the same time. This point is particularly salient because many of the provider-targeted ACA provisions intended to reduce cost growth (such as ACOs and bundled payments) are likely to result in increased consolidation among providers. Additionally, our findings related to the positive relationship between hospital market concentration and health insurance premiums have important implications for antitrust policy. By providing empirical evidence that higher hospital prices resulting from hospital market consolidation are indeed passed-through to employers in the form of higher premiums, our work suggests that hospital mergers do indeed have real welfare implications for consumers, rather than just reducing insurer profits, therefore providing justification for antitrust intervention.

1. American Hospital Association, 2009. Letter to The Honorable Christine Varney. May 11, 2009. Available: http://www.aha.org/advocacy-issues/letter/2009/09-05-11-ltr-pollack-varney.pdf
2. H.R. 344 Competitive Health Insurance Act, 113th Congress (2013).  Available: http://www.govtrack.us/congress/bills/113/hr344/text