When Past Is Not Prologue: The Weakness of the Economic Evidence against Health Insurance Mergers by Geoffrey A. Manne, Ben Sperry :: SSRN

The DOJ’s challenges of both the Aetna/Humana and Cigna/Anthem mergers in 2016 are fundamentally rooted in a timeworn structural analysis: More consolidation in the market (where “the market” is a hotly-contested issue, of course) means less competition and higher premiums for consumers. Following the traditional structural playbook, the DOJ argues that the mergers would result in presumptively anticompetitive levels of concentration, and that neither new entry not divestiture would suffice to introduce sufficient competition. It does not (in its pretrial brief, at least) consider other market dynamics (including especially the complex and evolving regulatory environment) that would constrain the firms’ ability to charge supracompetitive prices.

The parties contend that things are a bit more complicated than the government suggests, that the government defines the relevant market incorrectly, and that there is no correlation between the number of insurers in a given county and insurance premium pricing.The trials will, of course, feature expert economic evidence from both sides. But until we see that evidence, we are left to evaluate the basic outlines of the economic arguments based only on the existing literature.

A host of the mergers’ critics have determined that the literature condemns the mergers, based largely on a small set of papers purporting to demonstrate that an increase of premiums, without corresponding benefit, inexorably follows health insurance consolidation. In fact, virtually all of these critics base their claims on a 2012 case study of a 1999 merger (between Aetna and Prudential) by economists Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayanan, “Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry,” as well as associated testimony by Dafny, along with a small number of other papers by her (and a couple others).

This paper challenges the critics’ claims, taking a close analysis of the “Paying a Premium” paper as a jumping off point. While our analysis doesn’t necessarily undermine the paper’s limited, historical conclusions, it does counsel extreme caution for inferring the study’s applicability to today’s proposed mergers. That said, different markets and a changed regulatory environment alone aren’t the only things suggesting that past is not prologue. When we delve into the paper more closely we find even more significant limitations on the paper’s support for the claims made in its name, and its relevance to the current proposed mergers. In short: extrapolated, long-term, cumulative, average effects drawn from 17-year-old data may grab headlines, but they really don’t tell us much of anything about the likely effects of a particular merger today, or about the effects of increased concentration in any particular product or geographic market.

Source: When Past Is Not Prologue: The Weakness of the Economic Evidence against Health Insurance Mergers by Geoffrey A. Manne, Ben Sperry :: SSRN

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