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Industry concentration in the Medicare Advantage industry.

Why should the United States have a single Medicare system when it can have almost a thousand?

In its desire to keep the private sector in the healthcare industry, the U.S. has fostered the growth of the Medicare Advantage system. These plans have different costs and benefits for patients in comparison to standard Medicare.

In essence, advantage plans represent a giant outsourcing operation. The private sector is providing services that the government also is providing, but theoretically, in a more efficient way. This is the logic of privatization in public policy. It is designed to save the taxpayer money.

Government and Private Sector

The most recent data from the end of 2021 shows that the total enrollment for Medicare in the United States is 63,964,675 persons. But this is divided into two categories, enrollees who are part of “Original Medicare” and those part of a “Medicare Advantage” or other health plan. It almost sounds like buying a soft drink. There is the “New and Improved Advantage” flavor and the “Original.” Here, Medicare Advantage and Other Health Plans have an enrollment of 27,919,354 (56 percent). So, Medicare is delivered approximately half by the government and one-half by the private sector.

Structure of the Medicare Advantage Industry

There is one government, but is there more than one Advantage Plan? Yes. There are 939 separate Medicare Advantage Plans, almost one thousand of them. They vary in size. For the smallest plan, the enrollment is only 11 persons. The average enrollment among the 939 plans is 32,570 persons. However, the largest Advantage plan has an enrollment of 1,881,456 persons. This means that the largest plans are 171 thousand times larger than the smallest plan, and 58 times larger than the average Advantage plan.

This is not the complete picture. There are several holding companies that own more than one Advantage plan. The 939 separate plans are owned by 302 holding companies, most of which control only one or two plans. On the other hand, some holding companies control many separate plans.

For example, the top five holding companies – Centene, UnitedHealth, Humana, Anthem, CVS Health – together control around 33 percent of all plans.

One would suppose that the more plans that a holding company controls, the larger would be the number of its enrollees. But if we examine the top 10 largest holding companies and do a correlation analysis between the number of enrollees and number of plans held, the value is only 0.58, not a very strong correlation.

This can be seen by examining the two largest holding companies. Centene controls 108 Advantage plans and services 1,506,247 enrollees; UnitedHealth controls 79 plans yet services 8,140,542 enrollees.

Concentration in the Medicare Advantage Industry

We can make a rough estimation of the “market power” of these holding companies by measuring the number of enrollees they service. UnitedHealth is the largest, with 8,140,542 (27 percent) of all Advantage enrollees. This is followed by Humana with 17.2 percent and CVS Health with 10.7 percent.

Therefore, the top three largest Advantage plan holding companies, as measured by number of enrollees, service more than half of the entire market (55.2 percent). If we add the next two largest holding companies, Anthem and Centene, then we see that the top five largest holding companies service two-thirds (66.7 percent) of the market.

This is the level of industrial concentration. Five (or 1.7 percent) of the 302 holding companies together control two-thirds of the market.

Emerging Public Policy Questions

This level of concentration within the context of load-sharing between the government and the private sector raises a number of public policy questions.

1.Has the Medicare Advantage Industry Matured?

The lifecycle theory for firms predicts that eventually only a handful of companies will dominate the entire market. An example is the automobile industry in the United States today. This is the “maturity” phase of the lifecycle, preceded by the “introduction” and “growth” phases. The “maturity” phase is followed by “decline,” but we don’t need to worry about that, because people are going to continue to get sick forever.

The argument in favor of this arrangement is that these surviving giants are more efficient. For example, our largest player, UnitedHealth, services more than 8 million enrollees through 79 plans. It would be far-fetched to argue that it is not efficient.

2. Should 3-5 Players Dominate the Market?

The largest players dominate the market. Should they be allowed to? Should efficiency always win? If so, then it follows then that these largest and most efficient players should be allowed gradually to gobble up and acquire the hundreds of small plans, which cannot possibly be as efficient.

Is this the best outcome? Would further consolidation be better, or would there be a sacrifice of something on the altar of efficiency?

Also, efficiency leads to profits for the private sector. This could certainly raise the profits for these giants. Is that a reasonable public policy outcome? One could argue “No”, but the counterargument is that compared to the scale of Medicare operations, the actual profits are a very small price to pay for this efficiency.

3. Is the Private Sector More Efficient Than the Government?

Do we know if these private sector organizations are more efficient than the government? It is not clear if anyone knows the answer to this question. How could it be measured? The truly gargantuan CMS with its army of persons on the government payroll, enjoying the benefits and job security of government employment could be measured. But we would need to add in all the supporting organizations, such as the program integrity contractors, the auditors, the appeals system, the claims processors, and others, all of which are necessary for the government to do its job.

And not all government salaries are so low compared to the private sector. The director of the National Institutes of Health’s National Institute of Allergy and Infectious Diseases   made $417,000 in 2019, plus a large number of commissions from pharmaceutical companies. But that is probably far out of range of the average government payroll which most would assume is lower than the private sector.

If all these costs were added together, then would the government side actually be more costly?

On the other hand, if the private sector actually is less efficient, as probably many of these smaller Advantage plans are, then should they be allowed to continue as independent operators? We ask again: What do we sacrifice on the altar of efficiency?

4. Should Government and the Private Sector Have Exactly the Same Auditing Standards for Quality?

All industry observers know that across the Medicare world, both government and private sector, there are vast differences in auditing standards. It is not so much that the basic rules for providing services and what the health care provider should be paid are so varied. Instead, it is the interpretation of these rules that seems to change from one organization to the other.

For example, there are indications that providers being audited on the private sector side are not treated as well or as fairly as on the government side. Perhaps that is true, but the evidence is only anecdotal.

To really understand the situation, we would need to examine Medicare appeals cases and look at the details of why claims were rejected, and how settlements eventually were reached.

Is there a significant disparity as to provider rights and outcomes on the government compared to the private sector side? The counterargument would point out that the appeals process is more or less the same. The counter-counter argument, however, might point to differences in auditing rates, or differences in the administrative burden on the provider imposed by audits. In general, is it easier to supply health care services on the private sector side or is it more difficult? Are there more audits, or less? Are the appeal outcomes the same or different?

All these questions need further investigation.

The Future of Medicare

Above we have pointed out the astonishing division of labor between the government and the private sector in providing Medicare services to millions of Americans. We have shown that on the private sector side, the industry has reached a “mature” phase, with a very large amount of concentration where the top five holding companies are servicing two-thirds of the enrollees. We have pointed out that although there are underlying assumptions regarding differences in efficiency between the government and the private sectors, there is no definitive answer. Nevertheless, we expect that having two parallel systems of administration providing the same services to enrollees intuitively seems wasteful for the society.

Should efficiency win? Well, first, we need to truly understand where the efficiency is. Then, we will need to decide whether efficiency is the be-all and end-all of healthcare decisions and public policy.


Edward M. Roche, PhD, JD

Edward Roche is the director of scientific intelligence for Barraclough NY, LLC. Mr. Roche is also a member of the California Bar. Prior to his career in health law, he served as the chief research officer of the Gartner Group, a leading ICT advisory firm. He was chief scientist of the Concours Group, both leading IT consulting and research organizations. Mr. Roche is a member of the RACmonitor editorial board as an investigative reporter and is a popular panelist on Monitor Mondays.

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