Health Insurers Fight a Public Plan, but Rarely Each Other

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Not-so-Healthy Competition

Certainly there are plenty of statistics and studies that come out against the industry on the issue of competitiveness. Insurance companies complain about the AMA's methodology in its market-concentration studies, but the nonpartisan U.S. Government Accountability Office reached many of the same conclusions in a recent report. It found that, for small group coverage, the largest insurer in a state has on average 43% of the market, up from 33% in 2002. In nine states the largest carrier has more than 50% of the market. "There is obviously a need for more competition in this market," says Karen Davis, president of the nonprofit Commonwealth Fund, which does research on health-care issues.

The industry itself doesn't see it that way. Insurers argue that, with some 1,300 companies in the business, it can be cutthroat. "It doesn't feel like the market is not competitive to us," says Bradley Fluegel, chief strategy officer for WellPoint (WLP), the nation's largest insurer.

The benefits of healthy competition, however, are hard to spot. Between 2000 and 2007, annual increases in premiums averaged around 9%, while health-care spending increased only 6.7%. Over the past 10 years health insurance premiums have increased 120%, compared to cumulative inflation of 44% and cumulative wage growth of 29% over the same period, according to a Henry J. Kaiser Family Foundation survey.

Facing Dominant Hospitals

Part of the problem, says Commonwealth's Davis, is that the insurers cannot use their market power to bring medical costs down, because they are facing off against hospitals with just as much power. A 2006 study found that 88% of the nation's large metropolitan markets were dominated by one or two major hospitals. "You've got a dominant insurer up against a dominant provider of health care in a lot of markets," says Davis. "That just doesn't work out well for lowering costs."

Arnst is a senior writer for BusinessWeek based in New York. With reporting by Joseph Weber in Chicago.