Consolidation, competition, consumer costs: Healthcare econ experts break it all down, make it make sense

Much of the recent rise in health-insurance premiums traces to consolidation across the healthcare sector. Market forces like competition cannot stem the urge to merge among and between payers and providers, so neither will they staunch the price hikes. What healthcare consumers could really use now are updated regulation measures and antitrust oversight action from the government.

That’s the conclusion of business and economics researchers at Carnegie Mellon University and Northwestern University. Martin Gaynor, PhD, and Amanda Starc, PhD, dissect the state of health-insurance economics in an analysis published this month by the nonprofit and nonpartisan National Bureau of Economic Research based in Cambridge, Mass. 

Gaynor and Starc note that large, consolidated insurance companies have some ability to wield monopsony power. That’s the word for a market dynamic in which there is only one buyer.

Its effects are currently compounded because healthcare provider markets have consolidated too. 

“Hospital mergers have raised prices, with little evidence of improvements in quality,” Gaynor and Starc write, citing prior research. “In recent years, consolidation among hospitals and physician practices has grown. In this context, negotiations between insurers and providers are key in setting prices.”

Healthcare consumers caught in the crossfire  

Gaynor and Starc further point out that, as consolidated insurers gain more bargaining power, they can negotiate lower payments to providers. 

“If these savings are passed on, consumers could see lower out-of-pocket costs or reduced insurance premiums,” they write. “However, whether consumers benefit depends on the structure of provider and insurer markets and various regulatory and contractual factors.”

Meanwhile, because rational consumers tend to use care services until the benefits stop outweighing the costs, lower effective prices lead consumers to use more services than is socially optimal. 

“A (second-best) optimal contract must strike a balance between the additional risk protection from more extensive insurance coverage and the increased moral hazard that accompanies it,” Gaynor and Starc explain. 

Skimming cream (or picking cherries) 

Elsewhere in the paper, the researchers note that competition can influence the efforts of insurers to engage in “cream-skimming” or “cherry-picking.” Regardless of the idiom, this is where payers discourage enrollment by sickly individuals, accident-prone drivers and others who are likely to prove costly to cover. 

Here Gaynor and Starc cite a 2022 analysis of the Massachusetts Health Insurance Exchange showing that competition in hospital networks is affected by adverse selection. That’s the term actuaries use when high-risk individuals pick comprehensive plans, sometimes while keeping the insurer in the dark about their likely utilization levels. 

At scale, such instances of “asymmetric information” spread out across the policyholder pool can raise premiums for everyone. 

At the same time, plans that exclude costly “star” hospitals attract healthier patients, Gaynor and Starc observe. 

“These hospitals often draw sicker, higher-spending patients, even with risk adjustment—and so for the insurance companies, this form of cream-skimming is profitable.”

Names we all know come under the lights 

Gaynor and Starc take the discussion beyond abstractions and into real-world examples.

They point out that physician practice acquisitions have fueled UnitedHealth Group’s revenue growth from around $130 billion in 2014 to more than $400 billion in 2024.

This and similar market developments have shifted the employment landscape for U.S. physicians, the researchers show. 

“By 2022, [UHG’s] Optum was employing tens of thousands of doctors, contributing to an ongoing trend where independent physician practices have become increasingly rare,” they write. 

In addition to UnitedHealth Group, Gaynor and Starc underscore, the largest health insurers in the country—Humana, Elevance Health (formerly Anthem) and CVS Health (with Aetna)—have also increased their degree of vertical integration. 

“Each organization has made significant acquisitions to combine insurance, pharmacy, care delivery and home health services, as well as being major holders of healthcare data and providers of data analytics,” the authors report before noting:

• Humana targeted the senior market and Medicare Advantage.
   
• Elevance Health expanded its presence in Medicare Advantage as well. 
   
• CVS Health’s $69 billion to $77 billion acquisition of Aetna in 2018 was a major vertical merger. It combined CVS’s retail pharmacy, MinuteClinics, specialty distribution and Caremark pharmacy benefit managers with a major insurer. 

And that’s just for starters.

Something gained, but at what cost—and to whom? 

“On one side, these integrated models may offer the potential for enhanced efficiency by having everything ‘under one roof,’ as well as by giving insurance companies greater leverage to negotiate for lower prices,” Gaynor and Starc comment. “But they also raise concerns.”

These “huge conglomerates,” they remark, “may lead to greater market power for them as insurers.”

What’s more, they might also “leverage control over related services (possibly the entire healthcare ecosystem), potentially foreclosing competition and extracting additional profits at the expense of consumers.”

The 29-page paper is available for downloading here.