Are Health Insurance Markets Competitive?

Leemore Dafny

No 14572, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: I1 L1 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-com, nep-hea and nep-ias
Note: EH IO
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Citations: View citations in EconPapers (10)

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
Published as Leemore S Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, vol 100(4), pages 1399-1431.

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