Health Insurance Market Structure

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One of the main issues with the health insurance market in the U.S. is the nature of the market itself: oligopoly market. In America, health insurance markets are usually extremely concentrated with a single insurer commanding almost 50 percent of the market (Clemens 121). This nature of market correlates with cost, quality, and availability of health insurance and medical care.

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The health insurance industry as well as the hospital industry market structure might be the misery behind the skyrocketing medical costs and limited access to affordable health insurance and medical care. Studies have mentioned the concentration of the health insurance market as the leading cause of high insurance prices, which make the service expensive for many consumers in America to afford, especially those with low income and those who are unemployed (Karaca-Mandic, Roger, and Peter 30).

Notwithstanding, the healthcare and health insurance markets in the nation are extremely localized (Clemens 130). The reason behind this localization is the fact that the market regulation for healthcare occurs at the state level and not at the national level as is the case with many advanced countries such as Canada, Sweden, Spain and England to name a few. Therefore, the number of health insurance companies and hospitals residing at the local level dictates the market and not the number of suppliers at the national level. As such, the demand for health insurance remains low.

Literature Review

According to Austin and Hungefold (2015), the providers of insurance coverage in America are concentrated in some local areas, and many large firms that give employee insurance benefits are self-insured, and this reduces the competitive nature of the health insurance market. The two researchers observed that when markets are concentrated, and organizations that give workers benefits are themselves self-insured, the pressure on insurers is abated. The study noted that the employers do most of the insurance. In such a case, the employer acquires health insurance coverage for his or her employees with a particular insurer at negotiated prices. Otherwise, the employers might self-insure or even take the plan themselves and bare the whole risk. According to Austin and Hungefold (2015), more than 80 percent of the big employers prefer self-insuring to an insurance cover from an insurer. As a consequence, the study concluded that the demand for insurance is low due to the issue of self-insurance and that competition is low because the consumers are few (one employer decides on which firm to insure many employees).

Research by Grubber (2017) on the effects of the health insurance market feature on the healthcare industry growth, points out that there are many characteristics of health insurance markets, including market concentration, which does not only hinder competition but also leads to inefficient outcomes. Therefore, the exercise of power by and lack of pressure on the insurers within concentrated markets leads to higher prices as well as reduced output (limited health care access and high premiums). The study concludes that although there might be other characteristics of health insurance markets that lead to the argumentation of the health care costs, the oligopolistic nature of health care markets reduces the market competition, increases prices of health coverage, and hence reduces the demand for insurance (Gruber 11).

Another study by Bradley and Tish (2015) on the U.S health insurance market structure and its profitability found that concentration in the U.S health insurance marketplace has caused health insurance premium prices to double in the last decade. The researchers examined the relationship between insurers’ concentration, insurance premium prices, and the marketplace profits. Bradley et al. performed a study in 14 states. They used market concentration as their independent variable and marketplace underwriting profits as the dependent variable. The findings were that the states that register large insurers’ concentration exhibited high underwriting profits, with a strong positive correlation between market concentration and underwriting profits. The study also noted that the insurer’s profits were high in states that reported a high number of the uninsured. As a result, the researchers concluded that the concentration nature of the health insurance market is a critical factor contributing to high premium prices and low insurance levels. They recommended that stakeholders should address the issue of the concentration of insurers in order for the health insurance market to thrive.

Dickstein et al. (2015) conducted a study to examine the primary model that works in the health insurance marketplace. After conducting surveys and context analysis, he established that the prevailing model for insurance coverage in the U.S. healthcare is for an insurance firm to have a network of “preferred” healthcare practitioners within the local market, with competitive incentives for their clients to select services from only the members of that particular network (Dickstein et al. 122). The insurer would pay the rates of payment with the service provider within their network, and such rates are to be below the least of these providers. For instance, the study noted that the prices could sometimes be even ten times lower than the prices that another person with insurance outside that network or without insurance would pay to the same provider. The model, therefore, seeks to ensure that those with health insurance are limited to choosing providers within their own network.

An Analysis of the Issue

Bilateral oligopoly, which defines localized and concentrated insurers, characterizes the U.S. health insurance markets, and this reduces competition. There are more than ten thousand health providers and a few dozen of insurers. However, the healthcare markets throughout the country are generally local so what counts is not the availability or number of insurers and medical providers at the federal level but in the local (state) level. Moreover, since insurers work in collaboration with health providers, the situation becomes more complicated because the few practitioners available in local level are grouped into specialties. Consequently, in case a resident suffers from a particular illness, there may be only one or two providers handling the same condition, which limits choices. Furthermore, there might be just a small number of insurers who provide health insurance services at each specific local market. Regulatory reasons may partly explain this because insurers’ regulations happen at the state level.

Furthermore, as hitherto mentioned, the primary model of health insurance is based on a network. An insurer identifies medical providers who offer service within the local market. The insurer, in this case, has the responsibility of negotiating the treatment rates with the medical provider. The strategy is used as a form of competition because those people insured with the insurer of a particular network will enjoy low-cost treatment, where an outside member may pay even ten times for the same service (Dickstein et al. 123).

HMO (Health Maintenance Organizations) is another common model of health insurance in America. HMO also functions as a network model (Trish and Bradley 109). However, a preferred network model pays for some costs (though lower) when an out-of-network provider is engaged. On the other hand, HMO model is more restrictive because they only cover costs incurred when one uses a provider within the network. This limits competition between insurers.

The negotiations between the insurers and providers within a specific network are therefore the critical determiners of the treatment and hence insurance cost. When there is only one single insurer operating in a particular area, this insurer would have a leverage of practitioners and force them to take low rates of compensation. Should the provider turn down insurer’s low rate offers, the insurer will use the “monopoly” and bargaining power (since it covers many patients) and seek services from another provider in a network? This implies that neither the direct forces of demand nor the forces of supply will determine the price of services in the health insurance market.

The outcome of the preferred network has been a two arms’ race, concentrated markets, reduced competition, high prices, and low demand. An arms race occurs between insurers and medical providers (Stiglitz and Kay 71). Each side strives to consolidate and merge with others who give similar services in every local market throughout the U.S. to reinforce the bargaining based on the negotiations. A study shows the same: for the last decade, health insurance firms have merged, or the big ones have bought the small insurers (Trish and Bradley 111). Similarly, medical practitioners have merged; specifically, hospitals have become chains.

A Test of the Analysis

The analysis in this paper does not only give evidence in support of SCP (structure-conduct-performance) paradigm but also offers useful insights into the existing literature. The SCP paradigm postulates that the players of relatively less competitive markets exhibit high power and a strong positive association between concentration and profits (Karaca-Mandic, Roger, and Peter 32). SCP paradigm proponents argue that a particular market structure, which is considered exogenous endogenously, determines the performance of a market (Cole, Enya, and Karl 43). Towards this end, they hold that concentration triggers collusion leading to higher power and escalated profits. Parallel to SCP paradigm, this study established that concentration of insurers in local areas has led to the collaboration of firms, which have in turn enjoyed more power and hiked the premium prices to garner more profits. Less competition has made the preferred network model to dominate the market. On the extreme, firms have become price makers while forces of demand and supply should have been.

As furtherance to the existing study, the analysis observed the existence of bilateral oligopoly: with insurers on end and the medical providers on the opposite. As such, the study underscored the need to gain a strong bargaining base as the drive behind the consolidation among the players of either side.

Interpretation of the Results

The results show that health insurance markets and medical industry are centralized, which means there are only a few practitioners and few insurers at any local market. Suppose a consumer is in a market characterized by few practitioners and several insurers. The few providers would enjoy a great negotiating leverage deal with insurers and can ask for high prices for the services they offer. The insurers, who face such high rates, would pass the same to the consumers in the form of increased premiums. Alternatively, suppose a consumer is in a marketplace where several providers (many providers of each specialty) and few insurers characterize the market. The insurers would enjoy an excellent leverage deal and lure the practitioners to lower their medical rates. However, because there will be pressure on competition among insurers to pass the low prices to consumers, the buyers of insurance coverage will still have to pay high premiums.

The existence of strong incentives in the American healthcare industry has led to the evolution of the markets to local bilateral oligopoly structures with health insurers on one side and the health practitioners on the other. Due to intense pressure where each side seeks to consolidate, an arms race condition has been evident, as every side has merged. The outcome is concentrated local markets where one’s ability to negotiate determines the profitability. However, regardless of who wins: insurers or practitioners, the consumer does not only lose but also pays exorbitant rates. Therefore, this explains both low demand for insurance (high cases of uninsured) and a high cost of medication in America.


This study examined health insurance market structure as a critical issue with the health insurance market. The study found that the market is not only concentrated but also characterized by bilateral oligopoly system with insurers on one end and the practitioners on the other. The struggle for bargaining power leads to mergers on both sides. Irrespective of the winner, the consumer remains a loser because he or she must pay high premiums.

The results and the analysis are in line with the current and emerging health care discussion concerning health reforms in the United States. The findings of this study, which show that the increasing medical costs in the nation are due to high premium cost because of the nature of health insurance markets, are essential in making policies that can improve service delivery and the entire health industry. The results suggest that benefits and other policies that can reduce insurance premium rates must be considered to increase the demand for insurance in order to achieve medical affordability.

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Health Insurance Market Structure. (2019, Dec 13). Retrieved from