The Prescription for Better Health Insurance? Competition.

In reality, U.S. health-insurance markets are dominated by a small group of insurers—or sometimes just one. According to Kellogg professor of strategy Amanda Starc and Martin Gaynor of Carnegie Mellon University, the largest insurer in any given state enjoys 64 percent of market share on average. If you expand it to the top three insurers, they control up to an average of 91 percent of market share in a given state.  

With so much concentration among insurers, the idealized free-market conditions probably don’t apply, Starc and Gaynor argue. And that could have a big influence on the quality of healthcare services Americans receive. 

“We need to think through a world in which insurance markets aren’t actually competitive,” Starc says. “How will that affect the plans that are available to folks, and how will it affect healthcare more broadly?” 

This lack of true competition, combined with a peculiarity of health-insurance markets that incentivizes them to cater to healthy people instead of sick ones, can result in behaviors by insurers that undermine the typical benefits to customers from a market-driven system. A clearer understanding of the ways that anticompetitive forces and market incentives interact could help policymakers rethink what Starc calls “rules of the road”: regulations that encourage a version of competition that benefits both insurers and their customers. 

“We’ve learned a lot about how these markets operate,” Starc says. “People are often frustrated with their insurance plans; I think it’s worth thinking through why.” 

Shrinking from all sides 

Starc and Gaynor gathered evidence of anticompetitive health-insurance market consolidation in two directions: horizontal and vertical.  

Horizontal consolidation, which happens when the number of firms competing in a marketplace shrinks, is easy to see. “There’s just a small number of insurers out there,” says Starc. 

New firms looking to compete with longstanding insurers face an uphill battle. The new firms may attract enrollees at first by offering lower premiums. But in the long run, their relatively small patient pools may make it practically impossible to negotiate better prices with healthcare providers in their networks. That drives up the new insurers’ expenses and translates into higher premiums, making it extremely difficult for them to compete with more-established insurers. 

Vertical consolidation, meanwhile, occurs when giant health-insurance companies buy up smaller providers and medical practices. “Rather than paying them for their services using a contract,” Starc explains, “now I just own them, and they work for me.” 

Antitrust enforcement can act as a check on this vertical consolidation. In 2025, the Department of Justice required UnitedHealth to divest 164 care locations spread over 19 states as a condition of the company’s $3.3 billion acquisition of Amedisys, a large home-health and hospice care provider. But Starc and Gaynor warn that the “opaque” ownership structures of these large companies can make effective regulation challenging. 

The death spiral 

According to the researchers, one of the main forces responsible for health-insurance market consolidation is called “adverse selection,” where individuals know more about how sick they are than the insurance company does. 

Since insurance is more valuable to a sicker person than a healthy one, the former is more likely to purchase it. “That means that the pool of insured people will be sicker than the population as a whole,” says Starc—which means the insurer will likely have to pay out more claims than they would like to cover. 

This adverse selection can trigger so-called “death spirals,” where insurers raise premiums to offset the costs of a sicker customer pool, which drives even more customers away (because only the sickest people still consider the higher premiums worth it). Or the insurers may cut premium prices unsustainably in an attempt to hold onto customers. Either way, most companies in this scenario go under. 

“Some of the concentration we see [in health insurance] might just be a natural result of a market with adverse selection,” Starc says. “It might mean that the stable configuration of firms is a monopoly.” 

Health insurers, familiar with adverse-selection pressures, act strategically to offset them. One common tactic is to design plans that attract healthier-than-average people. But the bill for these perks is sometimes charged to U.S. taxpayers. 

“My favorite example comes from a colleague’s father,” Starc says. “His Medicare Advantage plan offers a lift pass for the ski resort in town. Not because they want to invest in his health—it’s because the only people that are interested in buying a plan that gives you a ski pass are healthy to begin with.”  

Another move that insurers in a concentrated market often make is to stint on care in subtle ways. Most enrollees are well aware of their premiums and deductibles. “But if I end up needing an expensive biologic, what’s the copay for that? How many forms are they going to force my doctor to fill out in order to cover it? That might not be as obvious,” she says. 

The more you know 

The goal of their investigation, says Starc, isn’t to point fingers or suggest pat solutions. Clearly, competition isn’t functioning as intended in health-insurance markets. Instead, the researchers set out to use these issues to help develop a framework for thinking more clearly about how to steer the market back on track.  

“In this country, given that we rely on markets to deliver [healthcare] outcomes, we need to think about how competitive those markets are,” Starc says. “It’s valuable to put the patterns that we see in the data in context. These are hard, thorny problems, and we ‘re going to need a variety of tools in order to address this.” 

Antitrust regulation is one such tool, but simply swatting companies that get too big isn’t enough. To create a truly healthy health-insurance marketplace, the authors argue, regulators and policymakers need a framework for rethinking the rules of the road: the complex interactions between adverse selection and regulatory guardrails.  

For example, the same rules that prevent insurance companies from pricing based on preexisting conditions also incentivize them to overenroll healthy people. And understanding those interactions is the first step toward reducing the distortions that they create in a market-driven healthcare system.