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.

Theoretically, an influx of 30 million new customers in any industry has the potential to spark innovation and open up new opportunities for smaller players. What better time for a smaller insurer to grow business than when millions of Americans will soon be shopping for insurance for the first time? Large insurance companies aren't as nimble, and the leaner organizations may be better able to respond to changes in the market.

More aggressive antitrust enforcement may also curb the rate of consolidation. In that period between 1998 and 2008, the feds challenged only three mergers on antitrust grounds. But the U.S. Justice Department said in March that it will be more aggressive in blocking mergers "that appear to present a competitive concern." It already denied the merger of two Michigan insurers this year.

In reality, it may not be that easy to relieve the pressures that come from combination of state and federal regulations and growing need for cost effectiveness. It's tough for any insurer to make it without the infrastructure and technology to manage the wellness, data-tracking, quality-incentive, and cost-control programs necessary in today's market.

There's one group to watch, though: Health plans in integrated systems. Although provider-owned health plans have been disappearing in recent years, in part because they are prime targets for acquisition by larger insurers, they are primed for a resurgence.

Physicians and hospitals are facing consolidation pressures just like insurers, and the intense focus on seamless and integrated care has raised interest in building health systems. Adding a health plan to that strengthens the overall alignment and cost-control potential.

Whether that will happen, and how quickly, remains to be seen. There's a lot of uncertainty about the future these days, but the trend line of the last decade, and the direction it is headed, is pretty clear.