Insurance: Why is there so little competition?
A Wickedly frustrating question
In this series, we’ve been answering some capital letter “WHY?!” questions about health insurance markets.
Is it profitable to make people healthy?
How do insurers make profit anyway?
Today:
Why is there so little competition in insurance?
We hinted last time that becoming a monopoly is a great way to increase your profits as an insurer. Top tip for most industries, really. But monopolies in health insurance is more nuanced than you think. Today we’re taking a page from Oz to peek behind the curtain and ask, “Monopolies- are you a good witch or a bad witch?”
1. Monopolies: For Good
How could a monopoly be good? Recall last post’s discussion on the basic mechanics of insurance. Insurance takes each individual’s uncertain risk of illness and pools them together. It provides a way for an individual to replace uncertain (and anxiety-inducing) potential financial risks and transform this into a predictable (maybe expensive, but stress-relieving) premium payment.1 Then, the insurer’s business is to reliably guess the total costs of healthcare for these pooled risks and charge individual premiums to cover it. This has the same qualities as guessing the outcome of a coin toss. Heads or tails? Toss once- tough. Toss 100 times- probably close to 50% heads, 50% tails. Toss 8.8 million times2- super predictable. Economists sometimes call this a ‘natural monopoly’: a product or service where a single firm at a large scale is more efficient than several firms each at a small scale.3 Risk pooling works best with a big pool.
What’s more, the more enrollees, the better insurer’s bargaining power with hospitals and provider networks. Insurers with millions of enrollees can threaten to remove a provider from their networks or bump them into a higher copayment tier. This would divert patient flow, threatening the hospital’s revenue. It’s good to be Popular, and insurers know about Popular!
2. Health insurance markets aren’t really what they seem
At a national level, I bet you can rattle off almost a dozen insurance companies. When we look at their national market share, it is quite modest. For example, the UnitedHealth Group is the largest commercial insurer by market share, and they only hold 14% of the national market. Elevance Health is 12% and CVS/Aetna is only 11%.4 And they all sell health insurance, right? So they all compete with each other, right? Nope, nope, nope.
First, health insurance can’t be sold across state lines.5 BCBS North Carolina and BCBS Texas are separate companies merely sharing part of a name who never steal business from each other. Thus, potential competition shrinks to only in-state insurers. Next, layer on that networks are mainly constructed using local providers (you’re not traveling cross-country for your broken arm or heart attack, even if it is cheaper), and this further shrinks potential competition to the county or municipality level.
But insurers’ real clever parry against competition is which market segment they focus on. The U.S. insurance landscape has three major markets. 1. Medicare Advantage- the private sector alternative to “Traditional Medicare”6 2. Employer Sponsored Insurance- obtained from your employer, if this employer is large and well-established, and 3. the Health Insurance Marketplaces set up the ACA- where individuals with no other access can purchase an individual insurance plan. Besides carving out geographic dominance, an insurer may choose to specialize in only one of the three market segments. For example, United Healthcare Group has become dominant in Medicare Advantage markets as the largest insurer in 42% of 161 metropolitan areas in 2023. However, in the Health Insurance Exchange markets, Centene Corporation was the largest insurer followed by Elevance Health (formerly Anthem).7 The real product for sale isn’t as broad as “health insurance” – in fact the product is “health insurance in my city in the market segment for which I qualify”. Insurance’s natural monopoly advantages quickly engulf such a narrowly defined market.
3. Tired of playing by the rules of someone else’s game!
How could we improve this? One of the more common calls to fix healthcare is some variation on ‘universal health care,’ or fully administered government insurance, such as in Canada.8 I just want to pause here and note that would be exactly one insurer—the definition of a monopoly— so it’s not given this solves our problem without introducing other drawbacks, such as lack of choice, long waiting lines, or poor incentives for quality. In my series on other international systems, some countries have multiple insurers with greater success, so what’s missing here?9
The lynchpin in U.S. insurer’s dominance is the flip side of the exchange—the consumer. Above, we laid out the three major insurance markets in the U.S. However, for the consumer, these are pretty much mutually exclusive. You can only enroll in Medicare if you’re over 65; you can only enroll in ESI if you are employed and your employer offers it; If you’re shopping the Health Insurance Exchanges, it’s probably because you’re self-employed or have no other option-- the prices and coverage are usually worse than ESI. Our market is lopsided; there are a plethora of insurers providing insurance plans, but there is no choice to the consumer side. The power of markets to bring down prices, improve quality, and spur innovation comes into play only if consumers can leave a plan and choose a competitor.
Next post, we’ll finish this series by homing in on the largest, longest-running segment of U.S. insurance which is also most guilty of restricting choice: Employer Sponsored Insurance. As always, keep me updated on what you’re up to or ask questions in the comments!10
(Special thanks to podcast superstar Dr. Erik Nesson for Wickedly good pun ideas- but I take responsibility for the worst ones!)
To read more about the mental health benefits from financial protection, read about the Oregon Health Insurance Experiment.
This is the size of the enrollee base of the largest insurer, Kaiser Permanente. Statista, “Largest health insurance companies in U.S. 2023, by membership” Feb 19, 2024.
Another pun-filled example of natural monopoly in healthcare- Why is the CDC like a power company??
American Medical Association, “AMA identifies market leaders in health insurance” Press Release, Dec 12, 2023.
Insurance must be in compliance with each individual state’s rules, essentially requiring a separate policy process for each additional state. There is a minor exception of 6 states which agreed to a “health care choice compact” allowed by the ACA. As of 2017, no insurers had engaged with this option. The Commonwealth Fund, “Essential Facts About Health Reform Alternatives: Allowing Insurance Sales Across State Lines” Controlling Health Care Costs, Explainer, April 5, 2017.
Read my fun explainer on Medicare Advantage.
American Medical Association, “AMA identifies market leaders in health insurance” Press Release, Dec 12, 2023.
In particular, Germany and Switzerland.
Or have a clever tagline that uses “defying gravity,” I truly apologize for this shortcoming.