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The Market Structure of the Health Insurance Industry

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The Market Structure of the Health Insurance Industry The Market Structure of the Health Insurance Industry D. Andrew Austin Analyst in Economic Policy Thomas L. Hungerford Specialist in Public Finance May 25, 2010 Congressional Research Service 7-5700 www.crs.gov R40834 CRS Report for Congress Prepared for Members and Committees of Congress The Market Structure of the Health Insurance Industry Summary In March 2010, Congress passed a pair of measures designed to reform the U.S. health care system and address the twin challenges of constraining rapid growth of health care costs and expanding access to high-quality health care. On March 21, the House passed the Patient Protection and Affordable Care Act (H.R. 3590), which the Senate had approved on Christmas Eve, as well as the Health Care and Education Reconciliation Act of 2010 (H.R. 4872). President Obama signed the first measure (P.L. 111-148) on March 23 and the second on March 30 (P.L. 111-152). On November 2, 2009, the House Judiciary Committee reported out the Health Insurance Industry Antitrust Enforcement Act (H.R. 3596), which would limit antitrust exemptions provided by the McCarran-Ferguson Act (P.L. 79-15). The House passed the Health Insurance Industry Fair Competition Act (H.R. 4626) on February 24, 2010. This report discusses how the current health insurance market structure affects the two policy goals of expanding health insurance coverage and containing health care costs. Concerns about concentration in health insurance markets are linked to wider concerns about the cost, quality, and availability of health care. The market structure of the health insurance and hospital industries may have contributed to rising health care costs and deteriorating access to affordable health insurance and health care. Many features of the health insurance market and the ways it links to other parts of the health care system can hinder competition, lead to concentrated markets, and produce inefficient outcomes. Health insurers are intermediaries in the transaction of the provision of health care between patients and providers: reimbursing providers on behalf of patients, exercising some control over the number and types of services covered, and negotiating contracts with providers on the payments for health services. Consequently, policies affecting health insurers will likely affect the other parts of the health care sector. The market structure of the U.S. health insurance industry not only reflects the nature of health care, but also its origins in the 1930s and its evolution in succeeding decades. Before World War II, many commercial insurers doubted that hospital or medical costs were an insurable risk. But after the rapid spread of Blue Cross plans in the mid-1930s, several commercial insurers began to offer health coverage. By the 1950s, commercial health insurers had become potent competitors and began to cut into Blue Cross’s market share in many regions, changing the competitive environment of the health insurance market. Evidence suggests that health insurance markets are highly concentrated in many local areas. Many large firms that offer health insurance benefits to their employees have self-insured, which may put some competitive pressure on insurers, although this is unlikely to improve market conditions for other consumers. The exercise of market power by firms in concentrated markets generally leads to higher prices and reduced output—high premiums and limited access to health insurance—combined with high profits. Many other characteristics of the health insurance markets, however, also contribute to rising costs and limited access to affordable health insurance. Rising health care costs, in particular, play a key role in rising health insurance costs. Complex interactions among health insurance, health care providers, employers, pharmaceutical manufacturers, tax policy, and the medical technology industry have helped increase health costs over time. Reducing the growth trajectory of health care costs may require policies that affect these interactions. Policies focused only on health insurance sector reform may yield some results, but are unlikely to solve larger cost growth and limited access problems. This report will be updated as events warrant. Congressional Research Service The Market Structure of the Health Insurance Industry Contents Introduction ................................................................................................................................1 How the Health Insurance Industry Developed............................................................................2 How the “Blues” Began ........................................................................................................3 Tax Advantages For Employer-Provided Health Insurance Benefits.......................................5 Commercial Insurers Enter....................................................................................................5 Introduction of Medicare and Medicaid.................................................................................6 The Rise of Managed Care....................................................................................................7 Blurring Distinctions Between “Blues” and Commercial Insurers..........................................8 Description of the Health Insurance Market............................................................................... 11 Intermediaries Play Key Roles in Health Care.....................................................................12 Demand for Health Insurance..............................................................................................15 Sources of Health Insurance Coverage ..........................................................................16 What People Know Differs: Information Problems in Insurance Markets.......................16 Price Effects..................................................................................................................20 Tax Benefits..................................................................................................................21 Supply of Health Insurance .................................................................................................21 Risk-Sharing.................................................................................................................21 Administration..............................................................................................................22 Types of Health Plans....................................................................................................22 Types of Insurance Companies......................................................................................22 Role of Employers ........................................................................................................23 Regulation of Health Insurers........................................................................................25 Market Concentration Among Health Insurance ........................................................................25 Measures of Market Concentration......................................................................................26 DOJ-FTC Merger Guidelines ..............................................................................................26 Market Concentration Among Health Insurers.....................................................................27 Market Concentration and Market Power ............................................................................29 Possible Causes of Concentration in the Health Insurance Market .......................................31 The Spread of Managed Care ........................................................................................31 Countervailing Power....................................................................................................32 Economies of Scale.......................................................................................................32 Marketing and Brand Management................................................................................33 Competitive Environment .............................................................................................34 Health Insurance Company Profitability....................................................................................34 Financial Results and Ratios................................................................................................35 Comparing Profitability By Industry .............................................................................36 Profitability Measures Reported by the A.M. Best Company .........................................43 Profitability Measures Reported by the Sherlock Company ...........................................46 Options for Congress ................................................................................................................48 More Aggressive Antitrust Enforcement..............................................................................48 Stronger Regulatory Measures.............................................................................................50 Regulation of Medical Underwriting .............................................................................50 Minimum Loss Ratio Requirements ..............................................................................51 Individual and Employer Health Insurance Mandates ..........................................................52 Health
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