The flurry of announced and rumored mergers in the health insurance sector has focused attention on how the Antitrust Division of the Department of Justice (DOJ) might assess the combination of some (or all) of the big five players (in order of size by revenues: UnitedHealth, Anthem, Aetna, Humana, Cigna).

There is no question but that consolidations of this magnitude would raise considerable concern for the simple reason that cost control in health care depends on competitive markets at both the payor and provider levels. Incidentally, robust payor competition is not only vital to the success of the Affordable Care Act (ACA), but also to voucher programs proposed by conservatives.

Lessons From Previous Mergers

Unfortunately, history does not provide much of guide as to how DOJ would assess any particular merger combination. This is because there are a number of distinct health insurance product markets that would need to be evaluated.

Because each market is local, antitrust analysis would also require an assessment of the competitive overlap in each region. DOJ, which has been criticized for its inattention to health insurance consolidation, has challenged only four mergers of health insurance companies, in contrast to dozens of cases and investigations involving hospital mergers. The result: all were settled by consent decree where the insurers agreed to divest overlapping plans and secured the government’s approval of the merger.

In 1999 DOJ settled a case challenging Aetna’s acquisition of Prudential Insurance, focusing on the Health Maintenance Organization (HMO) product market in the Dallas and Houston. In 2006 it challenged and settled the UnitedHealth’s acquisition of PacificCare Health Systems where the relevant product market alleged was the sale of insurance products to small group employers. In 2008, it focused on competitive effects in the Medicare Advantage market, settling its challenge to UnitedHealth’s acquisition of Sierra Health Services plans in Las Vegas. Finally DOJ’s complaint involving Humana’s acquisition of Arcadian Management Services Medicare Advantage business in 2012, also settled by a consent decree, alleged competitive harm in 45 markets in five states.

Complicating the analysis even more is the possibility that the government might find a competitive harm resulting from a merger’s effect on providers, that is, the enhanced market power of the merged firm might enable it to “unduly reduce” payment to physicians, a claim it advanced in the Aetna/Prudential and Humana/Arcadian mergers.

Competition Concerns

Given antitrust law’s focus on distinct local markets, the strategy behind some mergers may be to find a partner with minimal overlapping business, agree to divest in the markets with large combined market shares, and march off into the sunset. This result would not well serve competition for a number of reasons.

First, it’s important to remember that both providers and payors are evolving as a result of health reform. Hopeful signs from a market competition standpoint include the willingness of insurers to enter new markets via the health insurance exchanges and to develop innovative integrated delivery systems, such as Accountable Care Organizations (ACOs) in partnerships with hospitals and physicians. The lessons of oligopoly are pertinent here: consolidation that would pare the insurance sector down to less than a handful of players is likely to chill the enthusiasm for venturing into a neighbor’s market or engaging in risky innovation. One need look no further than the airline industry for a cautionary tale.

Secondly, a likely defense posits that mega mergers will enable payors to counter the market power of dominant “must-have” hospitals and specialty physician practices. This argument, which I have called the “Sumo Wrestler theory,” holds that only a large payor can effectively bargain down the prices demanded by large providers. Payors will then pass along the savings to their customers.

To be sure, there is substantial evidence that a large share of health care cost increases is caused by dominant providers charging high prices. There are a number of reasons to be skeptical of the idea that consolidated insurers will bargain down prices with providers. There is no compelling economic evidence that “bilateral” monopoly produces better results for consumers; and even if a dominant payor succeeds in bargaining successfully with providers it has little incentive to pass along the savings to its policyholders. Moreover, as experiences in Boston and Pittsburgh suggest, a showdown between the Sumo Wrestlers may result in a handshake rather than a serious wrestling match.

History also teaches that mergers often tend to beget mergers. There is a risk that the consolidation in the insurance sector will prompt even more mergers among hospitals, among physician groups, and acquisitions of physician practices, as each sector asserts a need to “level the playing field.” Mergers are not always driven by efficiency considerations; sometimes a merger “cascade” occurs simply because the other guy is doing it, hubris, or even “empire-building.”

Policy Concerns

A further concern relates to the influence that a highly concentrated insurance industry may wield in Congress, state legislatures, and regulatory agencies. With a large and growing portion of beneficiaries in Medicare and Medicaid served by private insurance companies, the laws and administrative regulations that govern plan bidding, appeals, and administration of health plans are increasingly important.

The ability to influence these rules are as significant to the bottom line as any aspect of insurers’ business operations. Although antitrust law does not explicitly take into account accumulating influence over the regulatory process, it is a concern that should call for greater scrutiny of mergers from politicians who claim to support market-based policies in health care.

Whether antitrust enforcement will deter excessive concentration in the insurance industry is an open question. If it fails, regulation may be the only alternative: state insurance regulators and state legislatures may need to step in to curb or undo consolidation or strengthen regulatory controls on insurer pricing.