Limited competition puts insurers in the driver seat

March 8, 2010 — 2:07pm ET | By Caralyn Davis

Competition is all but a fading memory in many U.S. health insurance markets, allowing many insurers both to employ aggressive pricing strategies and to cut existing customers to boost profit margins, so says a new Goldman Sachs research report backed up by a recent American Medical Association (AMA) study.

The Obama administration is using this news to push for health reform. Today, U.S. Department of Health and Human Services (HHS) Secretary Kathleen Sebelius followed up last week's White House meeting with insurance industry leaders by issuing a letter asking the CEOs of UnitedHealth Group Inc., WellPoint Inc., Aetna Inc., Health Care Service Corp. and Cigna HealthCare Inc. to provide public, detailed justifications for proposed health insurance premium increases.

Sebelius issued the latest letter in the wake of the research brief from New York investment bank Goldman Sachs. The brief gave a buy recommendation for both UnitedHealth and CIGNA because price competition is down over the past year and insurers are focused on improving profit margins, even if it means losing customers.

The Goldman Sachs analysis is supported by the 2010 AMA study, "Competition in Health Insurance: A Comprehensive Study of U.S. Markets," which is based on 2009 data. In an analysis of 313 metropolitan areas, the AMA found that 99 percent have "highly concentrated" insurance markets under guidelines used by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC). (By comparison, the AMA's 2009 study ranked 94 percent of metropolitan areas as highly concentrated.)

Only three metropolitan areas--Miami, Fort Lauderdale, Fla., and Colorado Springs, Colo.--failed to meet the criteria for highly concentrated markets, being deemed "moderately concentrated." However, moderately concentrated doesn't mean competitive. Both highly and moderately concentrated rankings would give the DOJ and the FTC pause about approving a same-market merger or acquisition.

Increasingly, states are under the stranglehold of a single insurer. One insurer enjoyed a market share of 70 percent or more in 24 of 43 states measured, up from 18 in 42 states in the 2009 study. In 92 percent of the 313 metropolitan areas, one insurer held at least a 30 percent share, said the AMA.

To learn more:
- read the HHS press release
- check out the New York Times article
- here's the American Medical News article