Benefits Business

Cornering the group health plan market

Blue Cross is one of several firms squeezing out independent agents

By Len Strazewski

Competition is the lifeblood of the insurance industry. It drives innovation, moderates prices and destroys the financially weak and administratively inefficient. At least, that’s the legend that persists in the world of the independent agent and one major reason why agents oppose liberal health reform proposals.

But after years of soft markets, property/casualty insurance agents are losing faith in the legend and employee benefits producers are starting to realize that competition among group health plans may also be a mirage.

For the past few years, employee benefits producers have reported a steady decline in the number of group health insurers active in local markets, down from eight to 10 just a decade ago to four or fewer in 2009. And comparative premiums—after controlling for plan design differences—are too close to call.

Now, new group health market research is supporting these anecdotes and revealing what many agents have been saying. Regional Blue Cross and Blue Shield (BCBS) health plans have become the single biggest player in a majority of U.S. markets and in some areas have a virtual stranglehold over small businesses that cannot self-fund their employee benefit plans.

In October, SNL Financial in Charlottesville, Virginia, released new market data that indicates that the Blue Cross and Blue Shield-related health plans are the largest competitor in 47 of 50 states and the District of Columbia. In 25 states, the largest companies—often Blue Cross and Blue Shield or parent companies—hold 80% or more of market share.

The study is based on National Association of Insurance Commissioners statutory filings for 2008 that are collected in all markets but California where the California Department of Managed Care requires its own documents that are not comparable.

Companies that operate Blue Cross and Blue Shield groups ranked among the largest aggregation of health plans across geographic regions. For example, WellPoint which operates several Blue Cross and Blue Shield groups, ranked as the largest health insurance carrier in 12 states. Regence, an­other operating company, dominated in three states.

The five largest health plans in each of the 49 states and District of Columbia held 75% or more of the market share in that state.

SNL notes that the company’s report tracks with a recent report from the Government Accountability Office (GAO) that analyzed the market share of group health insurers in small group markets around the country. The 2008 State Small Group Health Insurance Markets report is a follow-up to similar studies in 2002 and 2004.

The government report notes that while the median number of licensed small group health insurers in a state was 27—indicating that many companies had filed and were prepared to do business in a state—market shares consistently reflected dominance. The median market share in the states was about 47%, with the lowest concentration in Arizona with the biggest insurer having about 21%, and the largest in Alabama with the dominant insurer having about 96%.

The GAO study also noted that the five largest insurers combined represented three-fourths or more of the market share in 34 of 39 states that supplied this level of information and represented 90% or more of the market in 23 reporting states.

The Blue Cross and Blue Shield groups also dominated in this report. Thirty-six of 44 states that specifically identified the top insurer in the state identified a Blue Cross and Blue Shield plan as the largest and in all but one of the remaining states, BCBS was among the five largest.

The median market share of all the BCBS plans in the 38 states supplying this information was about 51%, with a range of less than 5% in Vermont and Wisconsin and more than 90% in Alabama and North Dakota.

The study also noted that competition is getting worse over time. The number of states in which the five largest plans accounted for 75% or more of the market share increased dramatically since 2002 when only 19 states reported that the largest insurers controlled more than 75% of the market.

The gains mostly went to BCBS plans. The median market share for BCBS plans in the states that reported this data was about 51% compared to 34% in 2002.

In this month’s employee benefits agency feature (“The Bigger Picture”) executives of the Birmingham, Alabama, agency Cobbs, Allen & Hall discuss how the BCBS dominance in Alabama has led the agency to shape its employee benefits practice around life and disability insurance products and human resources-related value-added services rather than attempt to compete with the dominating insurer using smaller health plans. BCBS of Alabama markets directly to employers.

The near-monopoly also prompted an investigative feature in the area’s local business publication, the Birmingham Business Journal in March identifying some of the ramifications of the market dominance. The article noted advantages and disadvantages for the state’s small businesses that do not have the claims volume to self-insure and so are limited to fully insured health plans.

The article (March 20, 2009) reveals that while BCBS of Alabama insures about 2.3 million state residents, competitors cover only about 500,000 based on the 2003 total which, based on the SNL and GAO reports, probably has changed in favor of BCBS.

While many Alabama small businesses say that the service they receive is excellent, the article notes that they are concerned about a “take it or leave it” attitude in renewal negotiations, even though the insurers have not made dramatic rate increases beyond the bounds of usual health care cost inflation trends.

The article also notes, however, that BCBS of Alabama has very high customer satisfaction rates in annual surveys and has been particularly adept at controlling costs with tough and economical provider network contracts that leave health care providers very little room for negotiation of service fees.

Despite their national dominance, BCBS supports some sort of national health reform, but opposes the latest [as of mid-November] legislative proposals from Democratic legislators. In October, after the U.S. Senate passed reform legislation and the U.S. House of Representatives committee released the details of its own bill, the Blue Cross and Blue Shield Association in Washington, D.C., that represents member plans across the nation voiced its opposition.

First and foremost among the group’s complaints was the proposed “public option” government-operated health plan that would be available to employers after 2015.

The association said that a public option would “jeopardize affordability and access to coverage to 160 million individuals who receive their benefits through their employers” and would reduce market competition.

“A government-run health plan would use its built-in advantages—no matter how it is initially structured—to take over the market. Although House leadership is proposing to use ‘negotiated’ rates to pay providers, the government does not negotiate,” the association said.

The BCBS statement, however, does not note that a government plan would also be competition for BCBS health plans that already have market dominance in many states.