More than 76 million baby boomers are heading into their golden years and that's expected to create a surge in spending on everything from prescriptions to hospice care.

Facing an avalanche of spending, insurers like UnitedHealth Group (NYSE:UNH) and WellPoint (NYSE:ANTM) may have little choice but to hike monthly premiums for consumers. If that happens,residents of some states may feel the pinch more than those living in other states.

Operating on uneven ground
Basic economics suggests that certain health insurance markets are better prepared to withstand the weight of spending growth than others. Big markets like California and New York; for example, have patient pools large enough that insurers can spread costs around, but tiny markets like Rhode Island are too small to benefit from those same economies of scale.

Source: Kaiser Family Foundation

The small state disadvantage is particularly evident when we crunch market share data and discover that the least populated states overwhelmingly have less competitive health insurance markets.

According to the Kaiser Family Foundation, three of the five states where market share is most heavily concentrated -- Rhode Island, Vermont, and New Hampshire -- rank near the bottom in terms of state population. 

The largest health insurer in Rhode Island, Vermont, and New Hampshire controls 94%, 90%, and 80% of the individual health insurance market in those states, respectively. That kind of market share concentration gives insurers little incentive to compete on price.

The small state disadvantage is also evident when we flip the table and discover that none of the five states with the lowest concentration of market share are ranked lower than 26th by population. In fact, three of the most competitive states, as measured by the market share of each state's largest insurers, are among the 20 most populated in the nation. Those states are New York, Missouri, and Wisconsin. 

Impact of narrow markets
A lot goes into setting individual plan premiums and premiums can vary dramatically from state to state based on mandates. For example, some big states like New York arguably have onerous insurance requirements that make health insurance more expensive than it might be otherwise.

Source: Kaiser Family Foundation

But generally speaking, an absence of competition appears to correlate with higher premium prices. According to a separate Kaiser Family Foundation study conducted in 2010, Rhode Island, Vermont, and New Hampshire were the second, fifth, and eighth most expensive markets for individual health insurance in the country, while Wisconsin, Missouri, and Colorado were among the top 10 least expensive states for individual health insurance.

Solving the problem of a lack of competition in states may not be simple. An argument could be made that casting aside the competitive barriers of intrastate insurance regulation that prohibit pooling patient populations across state lines could help lower premium payments, but there's no guarantee. Absent any changes, residents of small states may pay higher insurance premiums given they have fewer alternatives.