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Are Health Insurance Markets Competitive?

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  • Leemore Dafny
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    Abstract

    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.

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    File URL: http://www.nber.org/papers/w14572.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14572.

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    Date of creation: Dec 2008
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    Publication status: published as Dafny, Leemore S. 2010. "Are Health Insurance Markets Competitive?" American Economic Review, 100(4): 1399-1431. DOI: 10.1257/aer.100.4.1399
    Handle: RePEc:nbr:nberwo:14572

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    1. Mark Duggan & Fiona Scott Morton, 2008. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," NBER Working Papers 13917, National Bureau of Economic Research, Inc.
    2. Severin Borenstein & Joseph Farrell, 1999. "Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry," NBER Working Papers 7075, National Bureau of Economic Research, Inc.
    3. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
    4. 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.
    5. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    6. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1992. "Wages, Profits and Rent-Sharing," NBER Working Papers 4222, National Bureau of Economic Research, Inc.
    7. Katherine Ho, 2005. "Insurer-Provider Networks in the Medical Care Market," NBER Working Papers 11822, National Bureau of Economic Research, Inc.
    8. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
    9. 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.
    10. 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.
    11. Spulber, Daniel F., 1979. "Non-cooperative equilibrium with price discriminating firms," Economics Letters, Elsevier, vol. 4(3), pages 221-227.
    12. William T. Dickens & Lawrence F. Katz, 1987. "Inter-Industry Wage Differences and Theories of Wage Determination," NBER Working Papers 2271, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Sharon Tennyson, 2010. "Rethinking Consumer Protection Regulation in Insurance Markets," NFI Policy Briefs 2010-PB-07, Indiana State University, Scott College of Business, Networks Financial Institute.
    2. Fabio Milani, 2010. "Public option and private profits," Applied Health Economics and Health Policy, Springer, vol. 8(3), pages 155-165, May.
    3. Ronen Avraham & Leemore S. Dafny & Max M. Schanzenbach, 2009. "The Impact of Tort Reform on Employer-Sponsored Health Insurance Premiums," NBER Working Papers 15371, National Bureau of Economic Research, Inc.

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