THE WELFARE ECONOMICS OF A HEALTH PLAN MERGER

Recently, two large health maintenance organizations (HMOs) in Minneapolis merged to form a single company with over half of the total Twin Cities HMO enrollment. This paper strongly suggests that the merger will have adverse consequences for consumers. I use a model of health plan rivalry and empirical demand functions to predict that health insurance premiums in 6 Twin Cities firms will rise by as much as 19 percent after the merger. Next, I show how to calculate the loss in consumer surplus in a ''discrete choice'' model and predict that the merger will reduce surplus by 4.4% on average. Several objections to these conclusions are considered but, on the whole, the analysis raises serious concerns for public policy toward HMO mergers.