Merrill Matthews, 07.07.10, 11:49 AM ET

Forbes.com

Commentary

Can you say "insuragopoly"? How about "hospigopoly"? Then you better learn, because they describe how the health care system is changing under President Obama's health care reform legislation.

An oligopoly is when only a small number of large vendors sell a product or service. Oligopolies can occur naturally, when a company creates a great product and captures most of the market. But they are often a result of government policies that favor some players over others by restricting or eliminating competition, which often leads to higher prices and lower quality.

That's what will happen to health insurers, hospitals and even physicians, thanks to ObamaCare.

Bloomberg News recently cited the investor-relations chief of WellPoint, the country's largest health plan with 33.8 million members, as conceding that health insurers are moving toward an oligopoly. Currently, only 12 plans--from companies like UnitedHealthcare, Humana, Aetna, Cigna and WellPoint--cover two-thirds of those with private health insurance, according to the article. A recent study by the American Medical Association found that in nearly half the states, two health insurers covered 70% or more of the population, even though large insurers--which are often better able to operate under the mandates and restrictions imposed by many states--dominate private coverage. Until recently, there have been a lot of small players creating new, innovative and more affordable health insurance options that forced those "Big 12" plans to compete. That competitive pressure is now evaporating.

I know of at least three smaller health insurers that have, in the wake of ObamaCare, decided to stop selling coverage in the individual (i.e., non-group) health insurance market. These companies don't offer the kind of comprehensive coverage required under ObamaCare, and they don't think they can or should change their business model to try to compete with the bigger insurers.

Some small and medium-sized health insurers are planning to expand in other markets, such as supplemental coverage for Medicare beneficiaries. Some may offer more Aflac-type products, coverage that pays the insured a predetermined amount of cash if a specific medical event occurs. Others are quietly hoping one of the larger insurers will buy them.

Larger insurers have the resources to "play the game," hire the additional lobbyists and lawyers, and become de facto public utilities that constantly haggle with bureaucrats over the price controls imposed by the government.

Just look at that health reform "prequel," Massachusetts. When health insurers recently requested premium increases, the state denied 235 out of 274 of them. Harvard Pilgrim Health Care challenged the ruling and an insurance appeals board recently overturned it.

Under ObamaCare, there will be very little opportunity for startup health insurers to find a competitive advantage because the government, through regulations and the new state "exchanges"--state-created and controlled "markets" where people and small companies will buy their coverage--set the rules and decide the winners. Hence, insuragopoly.

Hospitals face a similar fate. To be sure, hospitals have already been consolidating for a decade or more, but we can expect the trend to accelerate under ObamaCare. Having fewer, larger hospitals gives hospital administrators more leverage when negotiating prices with health insurers. In the future they will have to negotiate with a budget-strapped federal government.

When health care costs begin to explode under ObamaCare, just as they have done in Massachusetts, the government will begin to ratchet down on the reimbursement levels. Or the government may "steal from the rich." In May the Massachusetts Senate passed legislation requiring the wealthiest Bay State hospitals to contribute up to $100 million to a fund to help lower the cost of insurance for small businesses and individuals.

Moreover, the health reform legislation intentionally restricts competition. One of the most competitive areas of the hospital sector was physician-owned hospitals. ObamaCare essentially eliminated the building of any new physician-owned hospitals, undermining a trend that was redefining the hospital experience by putting emphasis on efficiency and the patient (i.e., consumer).

Finally, it is unlikely physicians will escape the oligopolizing of health care. ObamaCare envisions a health care system where physicians work in groups. Democrats claim it is a way to coordinate and improve the quality of care, and to lower costs. But it is also a way of creating a top-down health care delivery system where the government dictates the way care will be delivered--and physician-employees obey. It's much easier to impose that vision if most physicians work for large groups.

To be clear, there is nothing wrong with large group or multi-specialty or coordinated-care practices. But groups like the Mayo Clinic and the Cleveland Clinic are private sector and voluntary. The problem comes when the government determines that is the best model and forces everyone else--providers and patients--to conform.

Although Democrats claimed their reform would bring competition to the health care system, in fact the system will rapidly move to a bevy of oligopolies where a handful of large players will survive, and maybe even thrive. The losers will be competition, innovation and ... patients.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation, a Dallas-based think tank.