Don Lucas played a key role in the growth and success of SIEPR.
By Miriam Wasserman
Health insurance companies and government antitrust regulators are battling over two proposed mergers that could fundamentally alter the national health insurance landscape. And research done by Stanford economist Mark Duggan bolsters the government’s case that consumers are likely to suffer if the mergers go through as structured.
The U.S. Department of Justice — along with attorneys general from several states — recently filed two lawsuits to block the $54 billion acquisition of Cigna by Anthem and the $37 billion purchase of Humana by Aetna.
Regulators argue that the deals would increase concentration in the health insurance sector, reducing the big five national providers to just three, and hurt market competition across the country. And that would lead to higher prices and reduced benefits for consumers, they say.
Anthem, Humana and Aetna plan to challenge the lawsuits filed in July, while Cigna officials say they are evaluating their options. The companies insist the mergers would allow them to become more efficient and effective, resulting in lower costs for consumers.
But Duggan’s research — which has become part of the policy debate — shows that history tells a different story.
"When there is an increase in concentration in these markets consumers tend to lose," says Duggan, the Trione Director of the Stanford Institute for Economic Policy Research.
The proposed union between Anthem and Cigna would be the largest merger in the history of the health insurance industry and would likely impact the markets for employer-provided health insurance, according to the lawsuits.
"We don't have that many examples of similar mergers so you have to look back pretty far in time to find a real world example of what happened when a large merger occurred," says Duggan, who is also the Wayne and Jodi Cooperman Professor of Economics at Stanford.
And that’s just what Duggan’s research did.
In a paper published in the American Economic Review four years ago, Duggan examined the impact of Aetna’s 1999 purchase of Prudential Healthcare on consumers and medical providers.
Along with Leemore Dafny — who is now at Harvard — and Subramaniam Ramanarayanan of the University of California, Los Angeles, Duggan compared what happened in areas where only one of the companies had a significant presence to places where both firms were in heavy competition.
They found that insurance premiums rose significantly faster where insurers gained market power as a result of the merger. Applying their results more broadly, they estimated that consolidation in the health insurance industry increased premiums by about 7 percent between 1998 and 2006.
Moreover, greater market dominance also made it easier to squeeze providers. Duggan and his coauthors estimated that the merger led to a 2.7 percent drop in health care-related employment in the typical market.
That decline in jobs hit doctors harder than lower-paid nurses, and doctors' salaries grew slower relative to those of nurses in the markets most affected by the merger.
Together, these results suggested a move to substitute doctors with nurses.
"There was a double win for the insurers,” Duggan says. “Both their costs fell and their prices went up.”
In the years following Aetna’s acquisition of Prudential, customers started looking for other options, and Aetna’s stronghold on the market began to loosen. But premiums did not shrink to their original costs.
"A temporary hike in market concentration led to a permanent increase in prices," Duggan says.
Duggan’s research has attracted the attention of lawmakers and policy influencers. A recent New York Times editorial making the case for robust competition among insurance companies referenced his 2012 paper, and his work was cited in testimony presented to the Senate Judiciary Committee last Fall.
The proposed deal between Aetna and Humana is expected to have the largest impact on seniors who are enrolled in or could benefit from Medicare Advantage plans, according to the Justice Department.
Humana and Aetna are among the largest and fastest-growing providers of those plans, which are a market-based alternative to traditional Medicare. The plans entail the federal government contracting with private insurers to coordinate and finance health care for 17 million Medicare recipients.
Duggan's research indicates that consumers in this segment see fewer benefits when the market is divvied up amongst a smaller number of insurance providers.
In a paper slated for publication in the Journal of Public Economics, Duggan examined the extent to which more generous government reimbursement rates are passed through to consumers in this market. The paper is co-authored by Amanda Starc and Boris Vabson, both of the University of Pennsylvania.
"Only in the most competitive markets, where there are lots of Medicare Advantage plans operating, do you see most of the benefits pass through to consumers," Duggan said.
The most competitive markets are the exception. In general, only about one-eighth of the additional reimbursement ended up in the wallets of consumers through lower premiums, deductibles or co-payments. Instead of better quality plans or lower prices, the researchers found the plan providers spent more money on advertising.
Whether or not the proposed mergers go through as planned, some form of consolidation among health insurance companies seems likely. Anthem is pushing for a speedy trial, and their deal is structured to close by next April. But existing research and the government’s case may help shape a market more beneficial to consumers.
Miriam Wasserman is a freelance writer.