Market Segmentation and Competition in Health Insurance

In the United States, households obtain health insurance through distinct market segments. To explore the economics of this segmentation, we consider the effects of pooling coverage provided through small employers and through the individual marketplace. We model households’ demand for insurance coverage and health care, along with insurers’ price-setting, to predict equilibrium choices, premiums, and health spending. Applying our model to data from Oregon, we find that pooling can both mitigate adverse selection in the individual market and benefit small group households without raising taxpayer costs: premiums in the individual market fall 11% for the most chosen plan type and consumers in both segments gain surplus. Our estimates provide insight into the effects of new regulations that allow employers to shift coverage to the individual market.