Are Health Insurance Markets Competitive?

Profitable firms pay more for health insurance only in markets with ten or fewer major carriers, and the effect is most pronounced in markets with six or fewer carriers.

In the United States, more than 67 percent of individuals with health insurance coverage purchase private insurance. Unfortunately, because data on private insurance are complex and difficult to obtain, more researchers have focused their attention on public insurance than on private markets. However, in Are Health Insurance Markets Competitive? (NBER Working Paper No. 14572), author Leemore Dafny sheds some light on private markets by studying the relationship between health insurance pricing and the profits of firms purchasing insurance for their workers. Using data on "fully insured" health plans offered to employees of 184 publicly-held firms in over 100 geographic markets in the United States for the years 1998 to 2005, she finds that increases in company profits are associated with increases in health insurance premiums, but only in geographic markets served by fewer than ten major insurance carriers. In the most concentrated markets -- those with six or fewer carriers -- a 10 percent increase in company profits is associated with a 1.2 percent increase in health insurance premiums. These results control for various attributes of the employee pool, such as family size, gender, and age, and for a variety of plan characteristics.

Further analysis suggests that in order to get lower rates, employers must be willing to change health plans. A plan switch is a "tough sell" in good times because employees must identify in-network providers, transfer medical records, and figure out the claims reimbursement system. The data reveal that employers are "especially reluctant to drop health plans when profitable, a finding that supports the hypothesis that profits act to raise employers' switching costs."

Given the consolidation of insurers during the study period, Dafny concludes that healthcare insurers are exercising market power in an increasing number of geographic areas. Therefore, research into the extent to which uncompetitive markets are contributing to higher healthcare costs would help to inform the public debate over healthcare reform.

When health plans are "fully-insured," insurance carriers bear the risk of medical expenditures incurred by plan enrollees in exchange for monthly premiums. By comparison, employers bear this risk in the case of self-insured plans, although many purchase "stop loss" insurance from a third party to mitigate this risk. Because many of the same large insurance carriers offer both self and fully-insured plans, enrollees are unlikely to be aware of the distinction. Dafny focuses on fully-insured plans because pricing for these plans is wholly determined by insurers.

The benefits consulting firm that supplied the plan data for this study also provided a measure of plan design that accounted for generosity of benefits. Plan restrictiveness was divided into four categories: indemnity, preferred provider, point of service, and health maintenance organization. Approximately 90 percent of the plans in the sample were health maintenance organizations.

-- Linda Gorman