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Are Health Insurance Markets Competitive?

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  • Leemore S. Dafny
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    Abstract

    To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. Such "direct price discrimination" is feasible only in imperfectly competitive settings. Using a proprietary national database of health plans offered by a sample of large, multisite firms from 1998-2005, I find firms with positive profit shocks subsequently face higher premium growth, even for the same health plans. Moreover, within a given firm, those sites located in concentrated insurance markets experience the greatest premium increases. The findings suggest health care insurers are exercising market power in an increasing number of geographic markets. (JEL G22, I11, I18, L11, L25)

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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 100 (2010)
    Issue (Month): 4 (September)
    Pages: 1399-1431

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    Handle: RePEc:aea:aecrev:v:100:y:2010:i:4:p:1399-1431

    Note: DOI: 10.1257/aer.100.4.1399
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    References

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    1. Baltagi, Badi H. & Wu, Ping X., 1999. "Unequally Spaced Panel Data Regressions With Ar(1) Disturbances," Econometric Theory, Cambridge University Press, vol. 15(06), pages 814-823, December.
    2. David Dranove & Anne Gron & Michael J. Mazzeo, 2003. "Differentiation and Competition in HMO Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 433-454, December.
    3. Severin Borenstein & Joseph Farrell, 2007. "Do investors forecast fat firms? Evidence from the gold-mining industry," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 626-647, 09.
    4. Gruber, Jonathan & Washington, Ebonya, 2005. "Subsidies to employee health insurance premiums and the health insurance market," Journal of Health Economics, Elsevier, vol. 24(2), pages 253-276, March.
    5. Duggan, Mark, 2004. "Does contracting out increase the efficiency of government programs? Evidence from Medicaid HMOs," Journal of Public Economics, Elsevier, vol. 88(12), pages 2549-2572, December.
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    Cited by:
    1. Barbos, Andrei & Deng, Yi, 2012. "The Impact of a Public Option in the Health Insurance Market," MPRA Paper 40849, University Library of Munich, Germany.
    2. Normann Lorenz, 2013. "Adverse selection and risk adjustment under imperfect competition," Research Papers in Economics 2013-05, University of Trier, Department of Economics.
    3. Martin Gaynor & Robert J. Town, 2011. "Competition in Health Care Markets," NBER Working Papers 17208, National Bureau of Economic Research, Inc.
    4. Michiel Bijlsma & Gijsbert Zwart & Jan Boone, 2011. "Competition leverage: How the demand side affects optimal risk adjustment," CPB Discussion Paper 181, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Miller, Amalia R. & Eibner, Christine & Gresenz, Carole Roan, 2013. "Financing of employer sponsored health insurance plans before and after health reform: What consumers don’t know won’t hurt them?," International Review of Law and Economics, Elsevier, vol. 36(C), pages 36-47.
    6. Johan N. M. Lagerlöf & Christoph Schottmüller, 2013. "Facilitating Consumer Learning in Insurance Markets - What Are the Welfare Effects?," Discussion Papers 13-12, University of Copenhagen. Department of Economics.
    7. Lagerlöf, Johan N. M. & Schottmüller, Christoph, 2013. "Monopoly Insurance with Endogenous Information," CEPR Discussion Papers 9774, C.E.P.R. Discussion Papers.
    8. Keith M. Marzilli Ericson & Amanda Starc, 2012. "Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange," NBER Working Papers 18089, National Bureau of Economic Research, Inc.
    9. Jason Allen & Robert Clark & Jean-François Houde, 2012. "Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market," Working Papers 12-30, Bank of Canada.
    10. Martin B. Hackmann & Jonathan T. Kolstad & Amanda E. Kowalski, 2013. "Adverse Selection and an Individual Mandate: When Theory Meets Practice," NBER Working Papers 19149, National Bureau of Economic Research, Inc.
    11. Jason Allen & Robert Clark & Jean-François Houde, 2014. "Search Frictions and Market Power in Negotiated Price Markets," NBER Working Papers 19883, National Bureau of Economic Research, Inc.

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