That is the title of a Journal of Economic Perspectives article by Martin Gaynor and Amanda Starc (2026). The article provides an overview of the current levels of competition in US health insurance markets, considers theoretic issues in what levels of competition are optimal, what empirical studies have found of the impact of competition and competition regulation and add some policy discussion. I provide some highlights from this article below.
Current state of health insurance competition in the US
Market share is not a single number. Market share varies by state. In the commercial market, in particular, market concentration varies significantly across regions.
“The market share of the largest insurer in the large group market ranges from 17 percent in New York to 94 percent in Alabama, where Blue Cross/Blue Shield has a de facto monopoly.”
In Medicare Advantage, UnitedHealthcare captures nearly one-third of the market; large health insurers (including UHC) have captured over two-thirds of the Medicare Advantage market.
Is bigger better?
What are the pros and cons of larger, more horizontally integrated payers?
“…health insurance markets may exhibit natural tendencies toward concentration…due to the inverse relationship between size and risk, economies of scale in claims processing, the impact of rising fixed and sunk costs, size advantages in contracting, and asymmetric information. Insurers with larger numbers of enrollees bear less risk and can spread risk over a larger number of policy holders, because sample variance declines with sample size. Larger insurers can spread fixed administrative costs across a broader enrollment base. Fixed and sunk costs may also be increasing due to the cost of investments in information technology…Larger insurers may also achieve better negotiating positions with hospitals and physicians, either via better management/negotiation skills or simply by their sheer size, creating cost advantages that smaller competitors struggle to match.”
On the other hand, large payers may stifle competition. For instance, new health insurance companies often being their lives with low enrollments, which makes it hard for them to negotiate discounts with providers and offer low premiums without risking losses. Further, any IT investments are spread over fewer enrollees. In short, it is hart for new payers to compete with incumbent behemoths.
Vertical integration: The payer-provider combination
Health insurers have not only consolidated horizontally, but vertically as well. This inclues purchases of large provider practices. Consider the following example:
“UnitedHealth Group, through its Optum subsidiary, has significantly expanded its footprint in the US health care market over the past decade by acquiring numerous physician practices. A pivotal acquisition was Optum’s $4.3 billion purchase of DaVita Medical Group in 2019, an acquisition that was subject to review by the Federal Trade Commission and led to DaVita’s integration into OptumCare, dramatically expanding Optum’s reach in direct patient care. Subsequent deals, such as the $236 million acquisition of Atrius Health in Massachusetts and the absorption of CareMount Medical, ProHEALTH, and Riverside Medical Group into the Optum Tri-State network, have further solidified Optum’s presence in multiple regions.”
CVS Health is another example:
“CVS Health’s $69–$77 billion acquisition of Aetna in 2018 was a major vertical merger. It combined CVS’s retail pharmacy, MinuteClinics, specialty distribution, and Caremark pharmacy benefit managers with a major insurer”
Is vertical integration a good thing? On the one hand, it is possible that there are significant efficiencies from integrating payers and providers. Provider gaming payment systems may be less common. However, the size of these conglomerates could also reduce competition across a number of dimensions. For instance, payers could direct patients to payer-owned hospitals over rivals (as found by Cuesta et al. 2025 of their analysis in Chile).
Additionally, the Gaynor paper points one way the vertical integration could help payers avoid minimum loss ratio (MLR) laws introduced by the Affordable Care Act (ACA).
“The MLR requires insurers to have medical expenses that are at least a minimum proportion of premiums—85 percent for large group plans. The fact that the MLR requires insurers to have a minimum proportion of medical expenses relative to premiums gives insurers an incentive to acquire medical providers and then inflate their payments to those providers. This enables an insurer to be in compliance with the MLR requirement, but without actually spending more money, as the additional amounts paid to providers owned by insurers are actually profits kept ‘in-house’ at the firm.”
If there are competitive markets, however, then the need for MLR laws may be limited given that payers may not be able to make excess profits if there is significant competition in the market.
Market imperfections and competition
The presence of adverse selection issues may also lead to more market concentration.
“In imperfectly competitive selection markets, insurers who lower prices to attract more customers will also disproportionately draw in healthier, lower-cost enrollees. A $1 price cut can reduce an insurer’s average costs by more than $1, intensifying the incentive to undercut rivals. Indeed, this aggressive price competition can push prices below the level needed to cover the costs of insuring the entire risk pool. As a result, even with multiple potential entrants, the market may only be able to sustain a single firm”
Empirical estimates of the impact of competition
The article also reviews a number of seminal articles related to empirical evidence of the impact of market concentration on prices, quality of care, and other outcomes.
“Yde (2025) develops an empirical model of the Medicare Part D market. Using new data on relationships between insurers, pharmacy benefit managers, and pharmacies themselves, he finds evidence of “profit tunnelling.” The insurance companies that offer Part D plans face government rules that tend to limit their profits, including cost-sharing rules and medical loss ratio rules, which require that a certain share of premiums paid be spent on benefits for enrollees. However, pharmacies owned by the insurance companies do not face such rules, and so the parent insurer has an incentive to shift profits from regulated insurance to less-regulated pharmacy operations.”
The article is interesting throughout and you can read the full piece here.
