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What seniors should know as Medicare’s market concentration grows (1 of 2)

Last week Medicare announced that there will be a seven percent increase in the number of Advantage plans offered in 2013. There will also be a slight uptick next year in the number of Part D plans, as Medicare indicated the month before. Because there will be additional choices for seniors, there appears to be more competition among plans, which helps keep prices low.

Behind this exterior, though, insurance companies are beginning to consolidate their ownership of plans, which means less competition. That has implications for seniors, who can sometimes benefit from market concentration and at other times should be wary of it. It also varies by type of coverage – when two or three companies dominate Medigap sales, that may not be a bad thing. On the other hand when two or three entities control a large slice of the Advantage and Part D markets, seniors should be alert to the risks.

For the sake of hyperbole, assume that someday – say thirty years from now after decades of stunning growth in the Advantage market — there are one million plan choices. On the surface that would seem to be a competitive market. But if two insurance companies and their subsidiaries were to own 60% of those plans, they would have undue control not only over their own plan members’ premiums, cost-sharing, and benefits, but over physicians’ salaries, hospital reimbursements and the use of medical services.

In that scenario, concentration would be harmful. And it’s not farfetched to anticipate a thriving Medicare marketplace with a vast number of plans controlled by relatively few firms. That’s already the starting to be the case. As consolidation expands, what does it mean for seniors?

According to a Kaiser Family Foundation issue brief last month, there’s been a moderate concentration of Part D plans since the program began in 2006. This year ten firms have 78% of stand-alone plan enrollment and the top three have 49%. The pace of consolidation among Part D plans has picked up in the last couple of years as CVS Caremark, which already owned the SilverScript Part D plans, acquired Universal American’s, HealthNet’s and the widely sold Community CCRx’s Part D plans.

As for Advantage plans, a report by consulting firm Avalere Health found that three companies control 44% of the market. During the past two years, Cigna purchased Health Spring’s Medicare Advantage business, Humana acquired the Arcadian Advantage plans, and UnitedHealthcare bought the Care Improvement Plus Advantage plans.

In a landmark 2004 study of consolidation among health insurance plans in the 50 states and District of Columbia, UC Berkeley health economist James C. Robinson pointed out in the prologue that “competition requires competitors.” He documented that, partly as a result of mergers and acquisitions, three or fewer companies represented more than 50% of the total enrollment in the commercial health insurance market in 47 states.

The study, published in Health Affairs, found that in 16 states the largest firm controlled more than one-half the market. Robinson also tracked the premiums of those companies that dominated. Analyzing a four-year period from the start of 2000 through the end of 2003, he found that the five largest health insurance companies increased premiums at annual rates that were between 1.5% and 2% higher than the growth in medical costs.

The three Medicare markets – Advantage, Medigap, and Part D — are somewhat more difficult for insurers to dominate because they are national markets. Also, Medicare regulates marketing practices more tightly than many states do, which helps control too-rapid concentration. Still, all three Medicare markets are gradually being taken over by a handful of insurance companies.

Medigap coverage, which is the oldest of the three, is the one most controlled by a small lineup of firms. According to a report last year from the U. S. Department of Health and Human Services, in 45 states the largest two Medigap insurance companies account for more than one-half of the total Medigap coverage, and in 12 states more than 80%.

Yet this concentration is not necessarily bad for Medigap policyholders. For one thing, pricing is transparent because benefits are standardized and don’t change from one insurance company to the next. That means premiums should be the main and often the only focus in choosing a plan, although when premiums are similar, criteria such as plan size and financial rating may also be helpful.

The HHS report said that in general, plans with the largest number of covered lives had smaller premium increases. In that regard a Medigap policy issued by one of the larger companies may be a safer purchase, since the company’s size enables it to absorb the impacts of a year or two of higher-than-expected claims without having to hike premiums sharply.

Another factor that may favor larger companies is that they pay out higher percentages of their premiums for care. The HHS report found that over a 10-year period, there was an 80% average medical loss ratio for individual policies and 83% for group policies. Smaller companies, however, pull that average down, since they usually pay commissions to agents who sell their policies (the smaller the company, the higher the commission rate it may have to pay).

Most of the large firms rely heavily or even exclusively on inside sales staff. These companies prefer to market through direct mail and radio/TV ads. Because of their size, their average marketing cost per policy sold is lower than that of a small firm selling only through commissioned agents. Thus larger firms maintain their low premiums and pay out higher percentages of their premiums in claims.

The benefits of size are less apparent with Medicare Advantage and Part D plans. It’s true that large companies have greater negotiating leverage with doctors and pharmaceutical companies. But it’s more difficult for seniors to assess each plan’s costs and benefits, which are not standardized and will vary from plan to plan and year by year. So, many seniors rely on two basic criteria when they choose a plan – low premiums and name recognition.

Both of these are criteria are flawed, particularly if they are the only ones used. Low premiums are not necessarily good indicators of how expensive plans are. A low-premium plan often turns out to be an expensive choice when cost-sharing and risk are also considered. Approximately one-half of Medicare Advantage plans have zero premiums, yet many of these plans contain fairly high risks for someone who becomes seriously ill during the year. Often seniors would be better off enrolling in an Advantage plan with a $20 monthly premium if it has a lower than average out-of-pocket limit and reduced co-insurance risk.

Seniors also rely on name recognition. If they are considering zero-premium Advantage plans from four insurance companies, they will gravitate to one or two names they know best – AARP UnitedHealthcare, Humana, Blue Cross, and Blue Shield. Large insurers that advertise nationally have an enormous home-field edge over less well-known companies.

The health insurance plans studied by James C. Robinson were in many cases lightly regulated by the states. In contrast Medicare’s various plans are tightly regulated by Medicare and Congress. As Robinson noted, greater degrees of concentration call for more regulation, but Advantage and Part D plans, which did not exist when he wrote his study, already have that built in. Even though these plans have some flexibility to adjust benefits and cost-sharing, it is constrained by a careful bidding process and minimum standards for plan benefits, cost-sharing, and drug formularies.

Retirees have to do their homework to stay away from weaker and more expensive plans, many of them run by large insurance companies. Doing so will save them thousands of dollars during retirement. They should not automatically purchase a Medigap plan from a large company, two of which had double-digit premium hikes in recent years. Neither should they simply enroll in a Part D or Advantage plan simply because it has low premiums and is a recognized brand. Instead, they need to do their homework. ◊◊

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