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Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange

  • Keith M. Marzilli Ericson
  • Amanda Starc

We analyze consumer demand and model the effect of pricing regulation under imperfect competition using data from the Massachusetts health insurance exchange. We identify consumer demand using coarse insurer pricing strategies. There is substantial heterogeneity in preferences by consumer type, with younger consumers twice as price sensitive as older consumers. As a result, older consumers face higher markups over costs. Modified community rating links prices for consumers that differ in both costs and preferences. Constrained prices are not simply the population-weighted average of unconstrained prices, because community rating changes the marginal consumer firms face. Tightening rating regulations transfers resources from low cost to high cost consumers, but also reduces firm profits and increases overall consumer surplus. We use our model to examine other insurance regulations. For instance, minimum loss ratios (designed to limit firm profits) will also alter the transfers between consumers. Moreover, risk adjustment will be insufficient to equalize prices across consumer types, as markups still differ. As a result, without a mandate, the market can unravel due to differences in preferences alone

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18089.

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Date of creation: May 2012
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Handle: RePEc:nbr:nberwo:18089
Note: HC
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  1. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 877-921, August.
  2. Richard Frank & Karine Lamiraud, 2008. "Choice, Price Competition and Complexity in Markets for Health Insurance," NBER Working Papers 13817, National Bureau of Economic Research, Inc.
  3. Keith Marzilli Ericson & Amanda Starc, 2012. "Heuristics and Heterogeneity in Health Insurance Exchanges: Evidence from the Massachusetts Connector," American Economic Review, American Economic Association, vol. 102(3), pages 493-97, May.
  4. Leemore Dafny & Katherine Ho & Mauricio Varela, 2010. "Let them Have Choice: Gains from Shifting Away from Employer-Sponsored Health Insurance and Toward an Individual Exchange," NBER Working Papers 15687, National Bureau of Economic Research, Inc.
  5. Chenghuan Sean Chu & Phillip Leslie & Alan Sorensen, 2011. "Bundle-Size Pricing as an Approximation to Mixed Bundling," American Economic Review, American Economic Association, vol. 101(1), pages 263-303, February.
  6. Jonathan Gruber, 2011. "Massachusetts points the way to successful health care reform," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 30(1), pages 184-192, December.
  7. David M. Cutler & Sarah Reber, 1996. "Paying for Health Insurance: The Tradeoff between Competition and Adverse Selection," NBER Working Papers 5796, National Bureau of Economic Research, Inc.
  8. Leemore S. Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, American Economic Association, vol. 100(4), pages 1399-1431, September.
  9. Keith M. Marzilli Ericson, 2014. "Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 38-64, February.
  10. Finkelstein, Amy, 2004. "Minimum standards, insurance regulation and adverse selection: evidence from the Medigap market," Journal of Public Economics, Elsevier, vol. 88(12), pages 2515-2547, December.
  11. Benjamin R. Handel, 2011. "Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts," NBER Working Papers 17459, National Bureau of Economic Research, Inc.
  12. Finkelstein, Amy & Poterba, James & Rothschild, Casey, 2009. "Redistribution by insurance market regulation: Analyzing a ban on gender-based retirement annuities," Journal of Financial Economics, Elsevier, vol. 91(1), pages 38-58, January.
  13. Jonathan Gruber, 2010. "The Tax Exclusion for Employer-Sponsored Health Insurance," NBER Working Papers 15766, National Bureau of Economic Research, Inc.
  14. Nicole Maestas & Mathis Schroeder & Dana Goldman, 2009. "Price Variation in Markets with Homogeneous Goods: The Case of Medigap," NBER Working Papers 14679, National Bureau of Economic Research, Inc.
  15. 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.
  16. Strombom, Bruce A. & Buchmueller, Thomas C. & Feldstein, Paul J., 2002. "Switching costs, price sensitivity and health plan choice," Journal of Health Economics, Elsevier, vol. 21(1), pages 89-116, January.
  17. Kowalski, A.; & Kolstad, J.;, 2010. "The Impact of an Individual Health Insurance Mandate on Hospital and Preventive Care: Evidence from Massachusetts," Health, Econometrics and Data Group (HEDG) Working Papers 10/18, HEDG, c/o Department of Economics, University of York.
  18. Ilayperuma Simon, Kosali, 2005. "Adverse selection in health insurance markets? Evidence from state small-group health insurance reforms," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1865-1877, September.
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