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Health insurance markets out of whack

By Donald J. Palmisano, M.D., J.D

The American Medical Association (AMA) has a very different perspective on health insurance markets from that reflected in the Federal Trade Commission (FTC)/Department of Justice (DOJ) report, A Dose of Competition, and in the January 2005 Physician News Digest interview with Mark Botti, an attorney with the DOJ. Our perspective is based on objective data and the experience of practicing physicians.

The AMA is very concerned that federal regulators continue to turn a blind eye toward the reality that in much of the country health insurance markets are not competitive. Health insurers have amassed significant market power through mergers and acquisitions but have received minimal scrutiny. Mr. Botti himself can point to just one instance where the federal agencies have challenged a health insurer merger: the 1999 Aetna/Prudential merger.

In contrast, physicians have been placed under a far higher level of scrutiny than is warranted by their comparative economic strength in today’s market. In April 2002, the FTC announced its intention to “find and bring” cases against physicians. Between April 2002 and December 2004, it brought 21 complaints against physician entities. Of these, 20 entities decided to settle rather than engage in a protracted and financially devastating legal battle with the FTC. This scrutiny is misplaced given that physicians are by far the least consolidated component of the health insurance industry.

It is important to remember that physicians play a critical role as patient advocates in an environment where health insurers have limited accountability for decisions that impact patients. The physicians’ role as patient advocate can be undermined when they have no leverage in negotiating contracts with health insurers. The AMA has found that in much of the country physicians face a true David and Goliath battle when dealing with health insurers.

The AMA has been studying health insurance markets in-depth for the past four years based on the most credible, publicly-available data. Our recently-released Fourth Edition of Competition in Health Insurance: A Comprehensive Study of US Markets used the Herfindahl-Hirschman Index (HHI), part of the 1997 guidelines used by the FTC and DOJ in reviewing the competitive impact of mergers. Markets that exceed an HHI of 1,800 are considered “highly concentrated” by federal regulators.

Most alarmingly, our study found that for the combined HMO and PPO markets, 86 of the 92 metropolitan areas had an HHI that exceeded the federal threshold of 1800. In addition, the study found that in 87 of the 92 markets, a single insurer had a market share of 30 percent or greater and that in 34 of the markets, a single insurer had a market share of 50 percent or greater.

The findings need to be viewed in the context of the unprecedented consolidation of the health insurance market during the 1990s. Between 1995 and 2004, there were over 400 mergers involving health insurers and managed care organizations. A new merger wave is underway. The 2004 acquisition of WellPoint Health Networks, Inc., by Anthem, Inc., (now known as WellPoint, Inc.) created the largest health insurer in the country, providing coverage to 28 million Americans. UnitedHealth Group has acquired four insurance companies in the past year, adding nearly four million covered lives, bringing its total to 22 million.

The ultimate consumers of health care – our patients – do not appear to be benefiting from the consolidation of health insurance markets. Instead, during this period of consolidation, health insurance premiums have risen dramatically and continue to rise without an expansion of benefits. Moreover, many of the large national health insurers have posted high profits over the past four years, even during times of economic slowdown. The primary beneficiaries of these mergers appear to be shareholders and the highly paid senior executives of these companies. The AMA believes that it is incumbent on federal regulators to take a hard look at whether consolidation in the insurance industry has harmed consumers.

Mr. Botti notes that “possession of market power is not unlawful.” While correct, this statement does not absolve federal regulators from taking the next steps in the analysis. For example, evaluating barriers to entry is critical to antitrust analysis. If entry is easy, even a high market share will not necessarily translate to market power. If entry is difficult or takes a number of years, then a health plan with a strong market position is more likely to be able to charge high prices without the threat of competition.

Entry into health insurance markets is difficult. If entry into health insurance markets were easy, one would expect to see significant entry in response to the healthy profits posted in the past five years. However, that has not been the case. In fact there has been minimal new entry into health insurance markets in that time period. The fact that large insurers like WellPoint and UnitedHealth Group are acquiring existing plans in markets as opposed to developing their own networks and products is further evidence of substantial barriers to entry.

Significant barriers to entry include state regulatory requirements and the cost of developing a physician network, which the DOJ has acknowledged. In its 1999 challenge to the Aetna/Prudential merger, the DOJ noted that “effective new entry for an HMO or HMO/POS plan in Houston or Dallas typically takes two to three years and costs approximately $50 million.”

At the 2003 FTC/DOJ Hearings on Health Care Competition Law and Policy, a former Missouri insurance commissioner testified that during the 1990s, he approved several mergers in the St. Louis market, in part based on arguments by the insurers that entry into the HMO market in St. Louis was easily achieved. However, subsequent events proved this not to be the case. He further testified that following these mergers, the St. Louis market became more and more concentrated and there has been no new entry since the mid-1990s. The facts bear out that entering insurance markets is simply not quick or easy and that consolidation has made it even more difficult.

Another key determinant in an antitrust analysis is whether health plans are charging “monopoly” prices. It is disingenuous for the federal agencies or the health insurance industry to dismiss the AMA’s findings and similar findings by others, including University of California Berkeley Professor James B. Robinson, by noting that without showing monopoly pricing, market share alone is meaningless. Because health plan pricing data is proprietary, this is an analysis that only the federal government can undertake through exercising its subpoena power. However, the federal agencies have not made any effort in this direction despite rising premiums and increased health plan profits.

The AMA is concerned that the United States is heading toward a commercial health insurance system dominated by a few publicly-traded companies that operate in the interest of shareholders, and not primarily in the interest of patients. It is time for the federal antitrust enforcement agencies to reexamine their enforcement priorities which have resulted in minimal scrutiny of health insurers and aggressive pursuit of physicians.

Donald J. Palmisano, M.D., J.D. is immediate past president of the American Medical Association.

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