That’s the title of one Economic Perspectives Journal Article by Martin Gaynor and Amanda Stark (2026). The article provides an overview of current levels of competition in US health insurance markets, considers theoretical issues regarding what levels of competition are optimal, discusses what empirical studies have found about competition and the impact of competition regulation, and includes some policy discussion. I am providing some highlights of this article below.
Current state of health insurance competition in America
Market share is not a single number. Market share varies by state. In the commercial market, in particular, market density varies considerably across regions.
“The market share of the largest insurers in the large group market ranges from 17 percent in New York to 94 percent in Alabama, where Blue Cross/Blue Shield has a virtual monopoly.”
In Medicare Advantage, UnitedHealthcare captures about one-third of the market; Large health insurers (including UHC) capture two-thirds of the Medicare Advantage market.
Is bigger better?
What are the advantages and disadvantages of larger, more horizontally integrated payers?
“…the inverse relationship between size and risk, economies of scale in claims processing, the effect of rising fixed and sunk costs, size advantages in contracting, and asymmetric information may exhibit a natural tendency toward health insurance market concentration. Insurers with larger numbers of enrollees carry less risk and can spread risk over a larger number of policyholders, as sampling variance declines with sample size. Larger insurers can spread fixed administrative costs over a broader enrollment base. Fixed and sunk costs may also result from investments in information technology. Costs are increasing due to… Larger insurers can gain a better negotiating position with hospitals and physicians either through superior management/negotiation skills or simply through their sheer size, creating a cost advantage that smaller competitors may struggle to compete with.
On the other hand, large payers may stifle competition. For example, new health insurance companies often have low enrollment, making it difficult for them to negotiate discounts with providers and offer lower premiums without risking losses. Furthermore, any IT investment extends to the under-enrolled population. In short, it is difficult for new payers to compete with the existing giants.
Vertical Integration: Payer-Provider Combination
Health insurers have consolidated not only horizontally, but also vertically. This includes purchasing large provider practices. Consider the following example:
“UnitedHealth Group, through its Optum subsidiary, has significantly expanded its footprint in the U.S. health care market over the past decade by acquiring multiple physician practices. A significant 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 the integration of Davita 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 strengthened Optum’s presence in many areas.
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 significant efficiencies can be gained from integrating payers and providers. Provider gaming payment systems may be less common. However, the size of these groups may also reduce competition along several dimensions. For example, payers may direct patients to hospitals owned by the payer rather than to competitors (as found by Cuesta et al in their analysis of Chile in 2025).
Additionally, the Gaynor paper points to one way that vertical integration can 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 creates an incentive for insurers to acquire medical providers and then increase their payments to those providers. This enables an insurer to comply with the MLR requirement, but without actually spending more money, because insurers The additional amount paid to owned providers is actually profits kept ‘in-house’ at the firm.
However, if there are competitive markets, the need for MLR laws may be limited, as payers may not be able to make additional profits if there is significant competition in the market.
Market imperfections and competition
The presence of adverse selection issues may also lead to greater market concentration.
“In imperfectly competitive choice markets, insurers that lower prices to attract more customers will also disproportionately attract healthy, lower-cost enrollees. A $1 price cut could reduce an insurer’s average cost by more than $1, intensifying the incentive to undercut rivals. In fact, this aggressive price competition could push prices below the level needed to cover the cost of insuring the entire risk pool. As a result, many Even with potential entrants, the market may only be able to sustain a single firm”
Empirical estimation of the effect of competition
This article also reviews several seminal articles related to the empirical evidence of the effects of market concentration on prices, quality of care, and other outcomes.
“Yde (2025) developed an empirical model of the Medicare Part D market. Using new data on the relationships between insurers, pharmacy benefit managers, and the pharmacies themselves, they find evidence of a “profit tunnel.” Insurance companies offering Part D plans face government regulations that limit their profits, including cost-sharing rules and Medicare loss ratio rules, which require that a certain amount of premiums paid. Part must be spent on benefits for enrollees. However, pharmacies owned by insurance companies do not face such regulations, and so the parent insurer has an incentive to shift profits from regulated insurance to less-regulated pharmacy operations.
The article is interesting as a whole and you can read the full excerpt Here.
