Business: Is the health insurance industry a monopoly?

This item tallies up the share of the market held by the top two insurance companies in a given state.

This item in Wikipedia gives the population for each state in America.

Combining the two pieces of information: the Y-axis is the market share held by the top two companies vs. the X-axis is the population of the corresponding state in millions. The trend is notable, the bigger the state, the less market share.



For those who want to see the raw numbers, see the figure below and I've included a correlation coefficient generated by Excel. +1 or -1 would mean perfect correlation while 0 means no correlation, thus the correlation coefficient is reasonably high.



I decided to bin out the data into small, medium and large states. I'm defining a small state as less than 4 million or the size of Los Angeles City or smaller. I defined medium size state as between 4 to 10 million which is about the size of Los Angeles County. Large states were defined as greater than 10 million or larger than the population of the County of Los Angeles.



I did averages for each of the three groups and then performed two-tailed T-tests between small vs. medium, small vs. large and medium vs. large. In all cases, statistical significance was met.



I think this analysis suggests that for markets that are small to medium, domination by one or two companies might be inevitable. Of note, there were exceptions to that rule. Since the insurance business is regulated at the state level, one wonders what the regulatory climate is like in those states that bucked the trend? And did bucking the trend prove beneficial for the people in those states? If so, other states should learn those lessons.

If you think about the nature of insurance as a business, you are pooling the risk of a large number of individuals to help pay for cost that at any given time is being incurred by a small number of individuals who need expensive health care services. Put in more human terms, it is 100 people pooling their money to help pay for the 5 people who are sick at a given time. Or put another way, it is you and I paying 40 years of insurance premiums to help cover the few times we wind up in the hospital with something really bad. Thus, might the markets in small states be too small to support much competition in an industry where some economy of scale (risk pool) is required to be effective?

So back to the original question: is the health insurance industry a monopoly?

In some small and medium size states, it seems to be pretty close. In the end, how many viable companies do you need in a given market to avoid monopoly/oligopoly behavior?

Would small and medium size states benefit from allowing sale across state lines thus making their markets "bigger" thus drawing in additional competitors?