Consolidation in the Health Insurance Industry Contributes Little to Rising Premiums

Consolidation explains very little of the steep increase in health insurance premiums in recent years.

The private health insurance industry provides coverage to over 160 million non-elderly Americans, gathering $850 billion in annual premiums. These figures do not include publicly-insured individuals whose coverage is outsourced to private insurers, or the elderly who purchase private supplemental insurance. The annual growth in private health insurance premiums has exceeded the annual growth in worker earnings in all but one of the last 20 years, in most years by a wide margin.

In Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry (NBER Working Paper No. 15434), co-authors Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayan investigate whether and to what extent consolidation and market concentration in the U.S. health insurance industry is responsible for the growth in premiums for employer-sponsored health insurance in recent years. Using data from employer-sponsored plans that covered over 10 million Americans annually between 1998 and 2006, the authors estimate that in a typical market, rising concentration in the health insurance industry contributed to a 2.1 percentage point increase in real premium levels. To place this change in perspective, the authors note that real health insurance premiums doubled over the same period.

According to this study, most Americans live in markets dominated by a small number of insurers. Indeed, 99 percent of markets were highly concentrated in 2006, up from 68 percent in 1998. However, this increase in consolidation has had a deeper impact on health care personnel than on premium levels, the authors find. Consolidation reduced the employment of physicians and raised the employment and wages of nurses, suggesting that consolidation facilitates the substitution of nurses for doctors. The authors further observe that premiums may not have increased much as a result of the increased consolidation, because the industry was relatively concentrated to begin with.

The analysis here relies on changes to market concentration produced by the 1999 merger of industry giants Aetna and Prudential Healthcare -- the authors caution that their findings are based on a sample of premiums for large firms. Within this sample, only a small share of premium growth was attributable to the resulting change in the degree of insurer competition. Our results confirm that Americans are indeed paying a premium on their premiums. However consolidation explains very little of the steep increase in health insurance premiums in recent years, the authors conclude.

-- Frank Byrt