Are Health Insurance Markets Competitive?

The United States stands virtually alone among leading industrialized nations in its heavy and increasing reliance on the private insurance sector to intermediate health care for its residents. The assumption underlying this system is that fierce competition among private insurers yields more efficient outcomes, broadly writ (Alain C. Enthoven 1978). However, a comprehensive survey on the state of competition in health care appearing in the 1999 Journal of Economic Perspectives concludes there is “little empirical evidence on competitive conduct by health insurance firms” (Martin S. Gaynor and Deborah Haas-Wilson 1999). A 2004 report on the same by the Federal Trade Commission and the Department of Justice finds most experts believe the market is highly competitive (with the vocal exception of groups representing physicians), although new research on the subject is scarce and plagued by data and identification issues (see Dennis P. Scanlon, Michael Chernew, and Woolton Lee 2006 for a thorough review).2 Meanwhile, continued faith in competitive markets is manifest in the rapid increase in outsourcing of public insurance to the private sector (Mark G. Duggan 2004, Duggan and Fiona Scott Morton 2008), as well as limited antitrust enforcement during two decades of extensive insurer consolidation. Only three combinations have been challenged by the Department of Justice, and these only in select markets.