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The ACA is changing the Industrial Organization of Healthcare | Economics Everywhere

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The ACA is changing the Industrial Organization of
Healthcare
by PATRICK on DECEMBER 31 , 201 5

As the Affordable Care Act has taken shape over the past few years, little has changed. Healthcare costs have continued to rise, insurance premiums have increased, and there are still millions of uninsured or underinsured Americans.
However there are some notable changes that have occurred in recent years. For one, a relatively small number of Americans that did not have health insurance are now insured. Many ACA advocates, including the President, argue that the decrease in the number of uninsured is a clear sign that the plan is working. And yet, we should expect these numbers to drop as it is now required by law to purchase insurance; therefore, this measure does not translate to marked improvement. Secondly, the entire healthcare sector is consolidating in response to the new law. This is an unseen (for some) consequence of the legislation that has greatly reduced competition in the sector. As insurers, providers, and healthcare retailer interests http://economicseverywhere.com/welcome/the­aca­is­changing­the­industrial­organization­of­healthcare/ 1/4

5/15/2016

The ACA is changing the Industrial Organization of Healthcare | Economics Everywhere

gain power, consumers are left with fewer choices.
In recent news there are indications that the five major insurance companies will start the merger process, leaving only three remaining. Aetna is in the process of acquiring Humana, and Anthem is pursuing Cigna. The two remaining super firms will only have one major competitor, UnitedHealth. The three companies will be responsible for administering policies to over half of all insured Americans. On the retail side of healthcare, Walgreens and Rite Aid are also in the process of merging, leaving them with only one major competitor, CVS. Healthcare providers are also consolidating in response to the ACA.
One thing is apparent: competition is shrinking, but why? High market share is often associated with higher prices, which is contrary to the motives that brought about the ACA. Mark Pauly, professor of healthcare management and business economics at the Wharton School of Business, recently shed some light on this conundrum. He cites two critical elements of the ACA that may have inadvertently brought about this massive consolidation effort. First, the ACA was implemented to bring down the cost of insurance premiums by forcing companies to trim their margins. As a result, insurance companies that are no longer allowed to compete on price are now competing by reducing the number of competitors in the market. Secondly, the ACA had a goal to improve the organization of healthcare delivery, forcing providers to adjust. As providers try to cope with all the new regulations, they are also faced with the growing power of insurance companies. The result is an arms race to see who will control the industry moving forward.
The victims of the arms race are those who are too small to have any sway in the fight. Small businesses are hit the hardest while large firms are mostly able to weather the storm. Individuals who are not covered by their employers are also left out to dry as premiums continue to rise; maybe the goal of the ACA was to move towards a single­payer system. If the reorganization of the industry continues it may break under its own weight. This may set up a move towards a single­payer system, fundamentally changing how Americans receive healthcare.
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