The Market Structure of the Health Insurance Industry

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Congress is now considering several proposals 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. 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 played a role in rising health care costs and in limiting access to affordable health insurance and health care.

H.R. 3200, entitled America’s Affordable Health Choices Act, has been reported out of three House committees: Energy and Commerce, Ways and Means, and Education and Labor. The Senate Health, Education, Labor, and Pensions Committee approved the Affordable Health Choices Act on July 15, 2009. The Senate Finance Committee reported out S. 1796, America’s Healthy Future Act, on October 13, 2009. Other health reform proposals include the Healthy Americans Act and the Empowering Patients First Act .

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.

The health insurance market has many features that can hinder markets, lead to concentrated markets, and produce inefficient outcomes. Furthermore, the health insurance market is tightly interrelated with other parts of the health care system. 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.

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.

Health costs appear to have increased over time in large part because of complex interactions among health insurance, health care providers, employers, pharmaceutical manufacturers, tax policy, and the medical technology industry. 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.