Private health insurance markets.

• Author: Dafny, Leemore
• Position: Research Summaries

Private health insurance plays a pivotal role in the U.S. healthcare system. Private insurers account for one out of every three dollars spent on healthcare, and even this figure understates the importance of the sector: many public insurance programs now rely on private insurers to manage a substantial share of spending (for example, Medicaid managed care, Medicare Advantage), and private insurers heavily influence out-of-pocket spending by their enrollees. (1) Looking ahead, the Affordable Care Act will subsidize the purchase of private health insurance through state or local health exchanges beginning in 2014. The industry is expected to gain 16 million customers as a result. (2) Notwithstanding this prominent role, the private health insurance sector has garnered relatively little attention from academic researchers, primarily because high-quality data on insurance contracts is so limited.

To explore various issues associated with health insurance markets, I developed a relationship with a major benefits consulting firm that gathers an extensive dataset on the health plans offered by its clients. The firm generously agreed to share the data for my research, subject to strict confidentiality criteria. At present the data span the period from 1998-2009, and contain information on roughly 900 distinct firms covering around 10 million participants per year. Although the sample is not random, I have found that it is representative of large firms nationwide, and hence of the large group insurance market, particularly for firms that operate at multiple locations.

I use these data--henceforth LEHID for "Large Employer Health Insurance Data"--to study the private insurance industry, focusing on local market structure, the economic conduct of insurance companies, and implications for health insurance premiums. I also use the insurance industry as a lens through which to examine the impact of potential policy reforms, such as tort reform and an expanded insurance exchange in which employees shop for a health plan using their employer subsidies.

The Economic Conduct of Health Insurers

Among the most striking facts I uncovered in my initial analysis of LEHID is that local health insurance markets are very concentrated. Moreover, many markets have become more concentrated over time. I pursued two different strategies to examine whether there is a causal link between insurance market structure and soaring health insurance premiums.

In a 2008 paper, I explore whether and where insurance carriers engage in direct price discrimination, charging higher premiums to firms (that is, their clients) with deeper pockets, as measured by operating profits. (3) In a competitive industry, price (for a fixed product) would not vary based on customers' ability to pay. I find that firms with increases in operating profits subsequently face larger premium increases. This relationship is strongest in geographic markets served by a small number of insurance carriers (particularly six or less). Therefore, a multisite firm with high profits in a given year (say, a large firm such as The Gap) will face higher premiums for its health plans, but only at the sites served by a concentrated insurance market. I do not find any evidence that firms with high profits face higher premium increases because they increase benefits on some dimensions Additional analyses reveal that firms with positive changes in...