Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry

We examine whether and to what extent consolidation in the U.S. health insurance industry has contributed to higher employer-sponsored insurance premiums. We exploit the differential impact across local markets of a large national merger of two insurers to identify the causal effect of concentration on premiums. Using data for large groups, we estimate premiums in the average market were approximately 7 percentage points higher by 2007 due to increases in local concentration between 1998 and 2006. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis-a-vis physicians, leading to reductions in their absolute employment and earnings relative to other healthcare workers.