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What drives insurer participation and premiums in the Federally-Facilitated Marketplace?

Jean Marie Abraham (), Coleman Drake, Jeffrey S. McCullough and Kosali Simon
Additional contact information
Jean Marie Abraham: University of Minnesota
Coleman Drake: University of Minnesota
Jeffrey S. McCullough: University of Michigan
Kosali Simon: Indiana University

International Journal of Health Economics and Management, 2017, vol. 17, issue 4, 395-412

Abstract: Abstract We investigate determinants of market entry and premiums within the context of the Affordable Care Act’s Marketplaces for individual insurance. Using Bresnahan and Reiss (1991) as the conceptual framework, we study how competition and firm heterogeneity relate to premiums in 36 states using Federally Facilitated or Supported Marketplaces in 2016. Our primary data source is the Qualified Health Plan Landscape File, augmented with market characteristics from the American Community Survey and Area Health Resource File as well as insurer-level information from federal Medical Loss Ratio annual reports. We first estimate a model of insurer entry and then investigate the relationship between a market’s predicted number of entrants and insurer-level premiums. Our entry model results suggest that competition is increasing with the number of insurers, most notably as the market size increases from 3 to 4 entrants. Results from the premium regression suggest that each additional entrant is associated with approximately 4% lower premiums, controlling for other factors. An alternative explanation for the relationship between entrants and premiums is that more efficient insurers (who can price lower) are the ones that enter markets with many entrants, and this is reflected in lower premiums. An exploratory analysis of insurers’ non-claims costs (a proxy for insurer efficiency) reveals that average costs among entrants are rising slightly with the number of insurers in the market. This pattern does not support the hypothesis that premiums decrease with more entrants because those entrants are more efficient, suggesting instead that the results are being driven mostly by price competition.

Keywords: Health insurance; Health Insurance Marketplace; Affordable Care Act (search for similar items in EconPapers)
JEL-codes: I11 I13 I18 (search for similar items in EconPapers)
Date: 2017
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