Less competition in health insurance isn't always bad: editorial

(Bloomberg View) — A wave of consolidation is sweeping through the U.S. health insurance industry. Most recently, Aetna has offered to buy Humana, and more such mergers are on the way. That must be bad news for consumers, right? Not necessarily.

As a rule, less competition is bad, because it means higher prices — and that’s the last thing U.S. health care needs. But health care is a complicated business. The likely effect of these mergers on the cost of insurance isn’t so clear-cut. The Justice Department, in deciding whether to oppose these deals, will have to weigh a variety of factors. It’s possible, for once, that less competition might do consumers a favor.

QuickTake: Obamacare, assessed

The crucial complication in health insurance is that consolidation in a different part of the health care industry is already well advanced. For good reason, the Affordable Care Act encouraged sellers of health care services — doctors, hospitals and other providers — to link up and coordinate their offerings. Better coordination, according to the designers’ reasoning, was the key to reducing unnecessary care and rewarding providers for good outcomes rather than the number of services supplied.

That reasoning was correct — but the result has been an increase in the size of provider networks, as hospitals merge with physician groups and each other. This encourages coordinated care, with teams of providers working together to prevent and manage diseases at every level of treatment, but it has a side effect. Health care networks have gained market power to raise their charges to insurers; in turn, the insurers pass those increases on to their customers.

Containing costs is part of what Obamacare promised, and the need is pressing. From 1999 to 2014, average annual premiums for employer-sponsored family health coverage tripled, from $5,791 to $16,834. If you’re wondering why you haven’t gotten much of a raise recently, the high and rising price of U.S. health care services — in some cases, multiples of what the same services cost in other developed countries — is a big part of the answer.

Coordinated care is an essential cost reducer, but increased bargaining power on the provider side of the industry threatens to undo some of the benefit. In most developed countries, responsibility for controlling prices falls on the government; in the U.S., with its aversion to such interference, the job has long fallen to private insurers. For this to work, insurers need to bargain with providers on equal terms. Within limits, consolidation in the insurance industry can serve this purpose.