Are Health Insurance Markets Competitive?
Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently face higher premium growth, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers' switching costs, and insurers exploit this inelasticity where they have sufficient bargaining power. Given the rapid industry consolidation during the study period, these findings suggest healthcare insurers possess and exercise market power in an increasing number of geographic markets.
I am grateful for helpful suggestions by William Collins, David Cutler, James Dana, David Dranove, Mark Duggan, Pinelopi Goldberg, Vivian Ho, Katherine Ho, Julian Jamison, Ilyana Kuziemko, Mara Lederman, Jin Li, Niko Matouschek, Sean Nicholson, Mark Pauly, Scott Schaefer, Kosali Ilayperuma Simon, Allen Steinberg, Scott Stern, John Tatom, Robert Town, Dale Yamamoto, three anonymous referees, and seminar participants at Columbia, Duke, University of Maryland, Wharton, the NBER Summer Institute, the American Economic Association Annual Conference, the Northwestern University Law School, and the Searle Center Research Symposium on Insurance Markets and Regulation. Michael Loquercio, Tamra Hayford, and Subramaniam Ramanarayanan provided excellent research assistance. Funding from The Searle Center on Law, Regulation, and Economic Growth at the Northwestern University School of Law is gratefully acknowledged. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
- Profitable firms pay more for health insurance only in markets with ten or fewer major carriers, and the effect is most pronounced in...
Dafny, Leemore S. 2010. "Are Health Insurance Markets Competitive?" American Economic Review, 100(4): 1399-1431. DOI: 10.1257/aer.100.4.1399
Leemore S Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, vol 100(4), pages 1399-1431.