Health Plan Concentration and Consolidation

October 2011

Health Plan Consolidation in the Current Environment
Research on Health Plan Consolidation and Concentration
Related HCFO Grants


In recent years there have been several waves of consolidation in health care. The 1990s saw a large number of hospital mergers and accelerated hospital acquisition of physician practice groups. By 2003, approximately 90 percent of Americans in metropolitan areas were in a “highly concentrated” market according to government antitrust standards.1 Experts believe that this trend is resurfacing in the current environment as providers respond to provisions of the Patient Protection and Affordable Care Act (Affordable Care Act or ACA) that encourage integration, such as accountable care organizations (ACOs).2 

The federal government has had a long-standing interest in health care market consolidation. In 2003, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) held joint hearings to assess the state of the health care marketplace and to study the roles of competition and antitrust enforcement in improving the market for consumers.3 The report from these hearings featured several recommendations to improve competition in health care. These included decreasing barriers of entry into provider markets and reexamining the role of health care subsidies due to their potential to distort competition.4 Last month, the House of Representative’s Committee on Ways and Means Health Subcommittee held a hearing on increasing consolidation in the health care industry (largely focused on hospital mergers and acquisitions). Several committee members focused on the potential negative consequences of consolidation for consumers, including less patient choice and increased prices.5 Experts testified that hospital consolidation has increased in recent years, resulting in increased provider market power that raises prices. Members of Congress also expressed concern that the ACO model would lead to further consolidation.6 

While issues surrounding hospital mergers and acquisition have figured prominently on the public agenda, another trend in the health care marketplace, health insurance plan concentration, has received somewhat less attention from policymakers and the press.  In recent years, the health insurance industry has also undergone its own period of increased consolidation. Large insurers acquired many small health plans that arose during the managed care era and this has led to markets typically being dominated by just a few health plans.7 Since most of the insured population is covered by private plans, the level of concentration in the health insurance industry is a key factor in the price of hospital services.8 To the extent that increased concentration leads to higher hospital prices, insurance premiums and overall health care costs are likely to rise with potentially reduced patient access to needed care. 

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Health Plan Consolidation in the Current Environment

The role of private health plans in the escalation of health care costs is often scrutinized by policymakers and by researchers who study health care markets. In a March 2010 report, the Massachusetts Attorney General’s office examined the drivers of health care costs in that state. The report found that there is extensive variation in hospital and physician prices, and that this variation is not correlated with factors such as the disease burden of the patient population, the quality of care, or hospital teaching status. The variation is, however, correlated with market leverage, or the relative position of a health plan or provider in a particular market.9 

For health plans, this leverage comes from having a large number of members in a particular market, which gives providers a strong incentive to participate in a plan’s network. The Massachusetts report found that relative leverage of insurers and providers in particular geographic regions had an effect on prices. When one insurer has more leverage over a hospital compared with other hospitals in the same region, that hospital will have lower prices than others. When a hospital has more leverage over an insurer, it can command higher prices. 10

For a more comprehensive picture of health plan consolidation nationwide, the Center for Studying Health System Change examines this issue as part of its regular site visits to 12 nationally representative metropolitan communities. Data collected by the Center in 2010 showed substantial variation among local markets in levels of health plan and provider consolidation.11 For example, in Miami the health plan market is fragmented and plans lack bargaining power amid an increasingly consolidated hospital system, leading to increased prices. There were also price increases in Boston, but stemming from a different cause—the “must-have” status of certain prestigious hospitals allowed them to raise payment rates on health plans. On the other hand, markets where there are dominate health plans—such as Lansing, MI, and Syracuse, NY—were able to keep rate increases more in line, even if dealing with a consolidated hospital sector.12 A recent analysis from the Kaiser Family Foundation found that the individual and small group markets in most states are quite concentrated, with a single insurer holding at least half of the individual market in a majority of states in 2010.13

The issues surrounding health plan and provider consolidation have led some states to experiment with rate review and regulation as policy solutions to promote better pricing and access for patients. In Rhode Island, the Office of the Health Insurance Commissioner (OHIC) used rate review to promote increased spending on primary care, restrict increases in hospital payments, and improve insurance network adequacy. This was accomplished by requiring health plans to invest in medical home models and electronic medical records, and to commit to broader payment reform initiatives. These standards were linked to rate review—if health plans did not meet the objectives, their proposed rate increases would be affected.14 For hospitals, the OHIC capped the rate of hospital cost increase at the level of the Medicare consumer price index.15 The need for hospital payment reform resulted from variation in payments to hospitals for the same set of services.16 

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Research on Health Plan Consolidation and Concentration

The policy issues surrounding both provider and health plan concentration are complex. In the wake of ACA implementation and increased consolidation and integration in both sectors, research on health plan consolidation and concentration can help to illuminate the potential consequences for health care markets.

Some of the early research on health plan consolidation focused on health maintenance organization (HMO) mergers and acquisitions and their effects on prices. A HCFO-funded study led by Roger Feldman, Ph.D., of the University of Minnesota, sought to determine if the benefits of HMO mergers outweighed the reductions in consumer choice that might result from reduced competition. When examining data on all non-Medicaid HMOs from 1985 to 1993, he and his colleagues found significant merger effects only in the most competitive markets, where premiums increased for one year after the merger. Their analysis ran counter to the expectation that HMO consolidation would benefit consumers through lower premiums.17 They also examined a few high-profile HMO consolidations from the mid-1990s to determine their effects on the levels of concentration in the market. Using national data from 1994-1997, Dr. Feldman and his colleagues found that the HMO industry was becoming more concentrated at the national level. However, they also found that this was partially offset by the entry of new HMOs and that most local markets were actually less concentrated in 1997 than in 1994.18

In later HCFO-funded work analyzing consolidation in the health plan industry, James Robinson, Ph.D., of the University of California at Berkeley, found that most markets in the United States are dominated by just a few firms. Large firms, in particular, command a very large market share. For example, if all Blue Cross Blue Shield plans were considered as one firm, it would account for 44 percent of the market nationwide. Dr. Robinson and his colleagues also found that during the study period (2000-2003) large health plans were able to increase their operating margins because they were consistently able to raise prices above the rate of growth in costs.19

More recent research on health plan consolidation and concentration has explored the trends in the current policy environment—the balance of health plan and provider concentration and its effect on health care prices. A 2008 study on health plan and physician market concentration in California found that approximately three-quarters of the state’s counties had health plan concentration ratios that the DOJ and FTC would consider “high” for antitrust purposes. The study also noted that the balance of market power tipped in the favor of physicians, allowing them to charge higher outpatient prices. The authors also note that the corollary was not true for health plans—higher health plan concentration was not associated with lower outpatient prices.20 

Recently published HCFO-funded research led by Glenn Melnick, Ph.D., of the University of Southern California, also examined the effect of the level of health plan concentration on prices. Dr. Melnick and his colleagues found that hospital prices in areas where health plans were most concentrated were 12 percent lower than in more competitive markets. In addition, the study also confirmed earlier findings that concentrated hospital markets lead to higher prices.  The results showed that more concentrated health plan markets could counteract the price-increasing effect of concentrated hospital markets.21

Through a recently awarded HCFO grant, Bradley Herring, Ph.D., of Johns Hopkins University, is examining the interaction between hospital and insurance market concentration and its effect on prices. The goal of the project is to better understand the functioning of health insurance markets, premium levels, and the relative bargaining power of both insurers and hospitals in a particular market.

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During ACA implementation, the issues of health plan consolidation and concentration are likely to remain of interest to researchers and policymakers. As provisions of the ACA encourage greater integration and consolidation among providers, the balance of market power with health plans may become a focal point for studying health care costs. Details on HCFO studies and related publications can be found at

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Related HCFO Grants

Title: HMO Mergers: Analysis of Trends and Public Policy Issues
Grantee Institution: University of Minnesota
Principal Investigator: Roger Feldman, Ph.D.
Grant Period: January 1, 1994-June 30, 1995

Do HMO mergers serve the public interest? This project evaluated mergers among existing HMOs in order to develop a framework for deciding whether specific mergers serve the public interest. The investigators: (1) determined whether more efficient HMOs merged into less efficient HMOs or vice versa; (2) determined the relative importance of factors that lead to HMO mergers and failures; (3) investigated the impact of HMO mergers on prices and efficiency of HMOs; and (4) developed a model for public policy evaluation of HMO mergers. The objective of this project was to provide a model for policymakers to determine whether the benefits of mergers of smaller HMOs into larger ones (i.e., lower costs and higher efficiency) outweigh the reductions in consumer choice which may result from reduced competition in local markets.

Title: Corporate Finance and Consolidation in Health Care
Grantee Institution: University of California, Berkeley
Principal Investigator: James Robinson, Ph.D.
Grant Period: September 1, 2002-August 31, 2005

What influence has access to capital had, during the period 2000-2005, on corporate consolidation in two health care sectors: insurance and hospitals? Specifically, researchers at UC Berkeley examined the financial capital/consolidation relationship by developing quantitative data on capital flows, conducting case studies of leading firms, interviewing capital market participants and analyzing finance literature on agency relationships. The objectives of the project were to use capital market analysis to inform public policy relative to (1) the development of regulations governing financial information disclosure; (2) the development of regulations (e.g. patent, antitrust) governing the influence of financial capital on health care organization and consolidation; and (3) the pros and cons associated with conversions by health plans from nonprofit to for-profit status, including how best to value underlying assets.

Title: The Effects of Health Plan Concentration on Hospital Prices, Costs, Capacity, Charity Care, and Outcomes
Grantee Institution: RAND
Principal Investigator: Glenn Melnick, Ph.D. and Yu-Chu Shen, Ph.D.
Grant Period: February 1, 2006-January 31, 2009

Do differences in health plan concentration affect hospital performance in important areas, including prices, costs, staffing, capacity, charity care, and patient outcomes? In particular, they addressed the following questions: 1) Do increases in health plan concentration slow hospital price growth? 2) Does increased health plan concentration lead to lower hospital growth? 3) Do increases in health plan concentration lead to reduced capacity in terms of closure or reductions of specialty units in hospitals (such as ER or trauma center) and/or reduced hospital staffing? 4) Do increases in health plan concentration affect patient outcomes? 5) Do hospitals reduce charity care in response to increased health plan concentration? 6) Do any of the above observed effects of health plan concentration differ depending on the level of managed care penetration, differences in dominant form of managed care (HMO vs. PPO), or differences in markets dominated by for-profit compared to not-for-profit health plans? The objective of this project was to inform the policy debate about whether health plan consolidation is welfare decreasing or welfare increasing.

Title: Exploring the Impact of Hospital-Market Concentration on Price Competition in Insurance Markets
Grantee Institution: Johns Hopkins University
Principal Investigator: Bradley Herring, Ph.D.
Grant Period: June 1, 2011-November 30, 2012

The researchers are exploring the extent to which insurance concentration and its balance with hospital concentration affect health insurance premiums. Their analysis incorporates 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 hypothesize 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 is 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.

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1. Vogt, W.B. “Hospital Market Consolidation: Trends and Consequences,” Expert Voices, National Institute for Health Care Management Foundation, November 2009. See also:
2. Summer, L. “Integration, Concentration, and Competition in the Provider Marketplace,” AcademyHealth Research Insights Brief, December 2010. See also:
3. U.S. Department of Justice, “Department of Justice/Federal Trade Commission Hearings to Focus on Health Care and Competition Law and Policy,” Press Release, January 28, 2003. See also:   4. U.S. Department of Justice and Federal Trade Commission, Improving Health Care: A Dose of Competition, July 2004. See also:
5. Kliff, S. “Health Care Consolidation: The Good, the Bad, and the Ugly,” The Washington Post, September 10, 2011. See also:
6. The Advisory Board Company, Daily Briefing, “Congress Criticizes Consolidation: Hospital M&A Activity Draws Fire on Capitol Hill,” September 9, 2011. See also:
7. Robinson, J.C. “Consolidation and the Transformation of Competition in Health Insurance,” Health Affairs, Vol. 23, No. 6, 2004, pp. 11-24. See also:
8. Frakt, A. “The Future of Health Care Costs: Hospital-Insurance Balance of Power,” Expert Voices, National Institute for Health Care Management Foundation, November 2010. See also:
9. Massachusetts Attorney General. Examination of Health Care Cost Trends and Cost Drivers. March 16, 2010. See also:  
10. Ibid.
11. Felland, L.E. et al. “Key Findings from HSC’s 2010 Site Visits,” Center for Studying Health System Change, Issue Brief No. 135, May 2011. See also:
12. Ibid
13. Cox, C. and Levitt, L. “How Competitive are State Health Insurance Markets,” Focus on Health Reform. Henry J. Kaiser Family Foundation, October 2011. See also:
14. Ten Napel, S. et al, State of the States, Robert Wood Johnson Foundation , February 2011. See also:
15. Buntin, J. “The Nation’s Only Health Insurance Commissioner Takes on the Health-Care System,” Governing Magazine, February 2011. See also:
16. Ten Napel, S., 2011. 
17. Feldman, R. et al. “Effect of Mergers on Health Maintenance Organization Premiums,” Health Care Financing Review, Vol. 17, No. 3, 1996, pp. 171-189.
18. Feldman, R. et al. “HMO Consolidations: How national mergers affect local markets,” Health Affairs, Vol. 18. No. 4, 1999, pp. 96-104. See also:
19. Robinson, 2004.
20. Schneider, J.E. et al. “The effect of physician and health plan market concentration on prices in commercial health insurance markets,” International Journal of Health Care Finance and Economics, Vol. 8, No.1, pp. 13-26. See also:
21. Melnick, G. et al. “The Increased Concentration of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices,” Health Affairs, Vol. 30, No.9, 2011, pp. 1728-1733. See also: