Mergers Create Health Insurance Oligopoly

WITH EACH ROUND OF ACQUISITIONS involving the nation’s largest health insurers, more power concentrates into the hands of ever-larger corporations. For example, just two companies, WellPoint, Inc. and UnitedHealth Group, Inc., now insure one-third of the 150 million Americans who have some form of private health insurance! In the short term, these acquisitions probably mean more difficult contract negotiations for laboratories and pathology group practices.

That’s because a national oligopoly is emerging in the health insurance industry. As laboratorians who took economics in college know, an oligopoly is “a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors.” (From www.wordreference.com.)

I believe the health insurance industry is currently evolving into a national oligopoly, supported by near-monopolies in selected cities. It is similar to the national oligopoly that’s developed in lab testing provided to office- based physicians, dominated by the two blood brothers. Also, there is the airline industry. Nationally, a handful of airline companies dominate. That is the oligopoly. However, in certain cities where an airline operates a hub, it holds a near monopoly. Northwest Airlines in Detroit, American Airlines in Dallas, and USAirways in Charlotte are well-known examples.

So the bad news for the laboratory industry is that consolidation in the health insurance industry—the oligopolistic marketplace now emerging—will give insurers even greater power during contract negotiations with physicians. Just as the major airlines raise and lower air fares with amazing synchronicity, so also will the ever-dwindling group of major payers offer similar reimbursement terms to physicians in their provider networks. By understanding some of the characteristics of oligopolistic behavior, shrewd pathologists and lab directors will do better when negotiating contracts against these health insurance behemoths.

Despite the short-term negative consequences of ongoing consolidation among the nation’s largest health insurers, over the long term, I predict the growth of consumer-directed health plans (CDHP) will not only erode some of the market power of these payers, but may render much of their current business organization obsolete.