Is Health Insurance Moving Toward Oligopoly?

Last week Michael Kleinman, vice president for investor relations at WellPoint, Inc., put a label on the insurance industry consolidation that has been underway for years. The market is becoming an 'oligopoly', dominated by just a few companies, and healthcare reform may accelerate the process, he was quoted as saying in a recent Businessweek article.

"There are going to be smaller insurers that are not going to be able to survive in this marketplace," Kleinman said of the post-reform era. An analyst's report cited in the article predicts that the health reform overhaul could push 100 insurers with 200,000 members or less out of business, "as the plans are increasingly unable to invest in the infrastructure and technology to effectively manage care."

But that same report found that 12 health plans already cover two thirds of enrollment in the U.S. commercial market. While it's easy to point the finger at new federal regulations and price controls, the industry has been consolidating for years.

Mergers, rather than small insurers going out of business, have been the main driver. Between 1998 and 2008, there were more than 500 mergers involving health insurers.

Now, in nearly half of states the two largest insurers have a combined market share of 70% or more, according to an American Medical Association study released earlier this year. And 99% of metropolitan markets are considered highly concentrated according to federal merger guidelines.

The question now is, what effect will the new reform law have on this long term trend? The answer may not be as clear-cut as it seems.