It's understandable that insurers want to merge

You saw this dynamic at work during the outcry over "narrow network" policies being offered on many exchanges. Regulators put heavy pressure on insurers to keep insurance prices down on the exchanges. They obliged by forming insurance networks out of their cheaper providers — which is to say, the ones who had the least pricing power, either because they were small, or because they were not very much in demand. Big teaching hospitals and other coveted providers were often left out, which resulted in angry consumers (voters) calling their congresspeople and local reporters to complain that their lousy insurance wouldn't let them take their kid to Seattle Children's.

Physicians and hospitals are, of course, responding to the same incentives that insurers are. With insurance paying more and more of the bills, doctors' offices needed to spend a lot for specialists who could navigate all the paperwork. Obamacare and other laws aimed at improving health care delivery have also added costs and other issues for providers. The drive toward Accountable Care Organizations, for example, almost forces physicians to consolidate into larger practices, because small offices cannot support either the administrative overhead or the financial risks of this model. Electronic health care records, another project of the Obama administration, are also more efficient when they're implemented at large scale.

You can think of it this way: The structure of America's third-party payer system allowed providers to make very nice incomes by providing health care services to basically price-insensitive consumers. Both insurers and the government reacted by ramping up the paperwork and claims rules to try to control this trend.

But providers had a great deal invested in keeping those income streams — not just because they need a third yacht, but because their office and hospital plant were constructed for a world where the money flowed readily, and they can't just give back the buildings and machines and office staff. They've responded to these pressures by getting bigger, recovering some of their lost income. So insurers and the government have turned the screws even tighter, which has given them even more incentives to get big. That's the story of American health care over the last few decades.

That doesn't mean that it is all happening at the same pace. Dan Diamond of the Advisory Board pointed out on Twitter that mergers between hospitals and mergers between insurers are overseen by different federal entities, and those two entities don't always see eye to eye on how much market power is too much. But the arms race makes it likely that changes in one sector will trickle over to the other. "After all," he writes, "the Federal Trade Commission (FTC) has stopped hospitals — again and again — from gaining what they perceive to be too much market power. But in a world with a Huge Three of insurers, wouldn't regulators change their stance on hospitals?"

According to the Journal, after this merger frenzy, the three biggest insurers will cover 133 million people, more than a third of the population (and much more than a third of our privately insured population). If the Department of Justice lets the insurer deals go through, the FTC may think that hospitals need a counterweight to all that pricing power. There are real pressures pushing them to merge, not just anticompetitive greed.

And what that means for you is a world in which your health care is increasingly delivered by only a few big players. That has a lot of implications both for the care you get and the price you pay for that care. How all this will shake out is far from clear. But one thing is: When everyone is supersizing, it's not hard not to suspect that you've been assigned the role of "tiny mortal standing between Godzilla's toes."

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story: Megan McArdle at [email protected] To contact the editor on this story: Philip Gray at [email protected]