The Role of Agents and Brokers in the Market for Health Insurance

• Author: Peter Graven,Roger Feldman,Pinar Karaca‐Mandic
• Date: 01 March 2018
• Published date: 01 March 2018
• DOI: http://doi.org/10.1111/jori.12139

© 2016 The Journal of Risk and Insurance. Vol. 85, No. 1, 7–34 (2018).

DOI: 10.1111/jori.12139

7

THE ROLE OF AGENTS AND BROKERS IN THE MARKET FOR

HEALTH INSURANCE

Pinar Karaca-Mandic

Roger Feldman

Peter Graven

ABSTRACT

Health insurance markets in the United States are characterized by imperfect

information, complex products, and substantial search frictions. Insurance

agents and brokers play a significant role in helping employers navigate

these problems. However, little is known about the relations between the

structure of the agent/broker market and access and affordability of

insurance. This article aims to fill this gap by investigating the influence of

agents/brokers on health insurance offering decisions of small firms, which

are particularly vulnerable to problems of financing health insurance. Using

a unique membership database from the National Association of Health

Underwriters together with a nationally representative survey of employers,

we find that small firms in more competitive agent/broker markets are more

likely to offer health insurance and at lower premiums. Moreover, premiums

are less dispersed in more competitive agent/broker markets.

INTRODUCTION

Health insurance markets in the United States are characterized by the presence of

imperfect information, complex products, and search costs that make matching

consumers to insurance products imperfect. Broadly, imperfect information and

other imperfections in the search process such as search costs are referred to as

“search frictions” in the literature (Cebul et al., 2011). Consumers can choose from a

wide range of insurance products that vary in multiple dimensions such as

deductibles, provider networks, coverage of specific services and medications, and

Pinar Karaca-Mandicis at Division of Health Policy and Management,University of Minnesota,

Minneapolis, MN, and a Research Associate at NBER. Karaca-Mandic can be contacted via

e-mail: pkmandic@umn.edu. Roger Feldman is at Division of Health Policy and Management,

University of Minnesota, Minneapolis, MN. Feldman can be contacted via e-mail:

feldm002@umn.edu. Peter Graven is at Department of Emergency Medicine, Oregon Health

& Science University, Portland, OR. Graven can be contacted via e-mail: graven@ohsu.edu.

Disclaimer: “Any opinions and conclusions expressed herein are those of the authors and do

not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to

ensure that no confidential information is disclosed.”

8 THE JOURNAL OF RISK AND INSURANCE

out-of-pocket prices for different health services. Moreover, at the time of signing an

insurance contract, most consumers have incomplete information about the types of

health care services they will need ex post; thus, the information obtained on each

product varies across consumers. Insights from search theory suggest that the

presence of search frictions leads to equilibrium premiums higher than those that

would prevail in competitive insurance markets. Moreover, premiums are dispersed

even for identical products.

In these types of market environments that exhibit high search frictions, it is only

natural that intermediaries emerge, whom Stigler (1961) refers to as “specialized

traders.” These intermediaries exploit economies of scale in gathering information

and provide a marketplace for matching buyers to sellers and products;their presence

potentiallyreduces information-gathering and transactioncosts. When search frictions

decrease, the resulting increase in search intensity is expected to lead to lower

premiums(Diamond, 1971; Reinganum, 1979; Carlson andMcAfee, 1983; Stiglitz, 1989;

Cebul et al., 2011). Whether decreased search frictions also lead to a decrease

in premium dispersion is theoretically ambiguous and depends on the market

environment (Baye, Morgan, and Scholten, 2006, provide a comprehensive review).

Intermediaries play a significant role in access, finance, and delivery of health

insurance products. They sell insurance products from several insurers (brokers) or

from a single insurer (agents). In exchange, they receive commissions typically from

the insurer. In general, they act as the consumer’s agent, providing specialized

services to help consumers navigate the complexities of insurance products when the

consumer lacks this expertise (Cummins and Doherty, 2006; Alderman, 2010). For

example, they help individual consumers and employers determine desired benefit

packages and obtain premium quotes for those packages. They provide guidance to

employers on the complicated nature of rating and underwriting rules.

The role of brokers and agents is particularly important for small firms that usually

lack the expertise and human resource departments to evaluate large health

insurance choice sets. Small firms rely heavily on agents and brokers to search for

health insurance products to offer their employees (Hall, 2000; Conwell, 2002). The

National Federation of Independent Business (NFIB) survey of firms suggests that

71 percent of small firms that offered insurance in 2007 purchased their plans from an

insurance broker (Dennis, 2007).

Despite their direct and indirect influence on complex health insurance decisions,

there is no empirical evidence about the effects of agent/broker market structure on

access to and affordability of health insurance. In this article, we investigate the effect

of agent and broker market structure on the health insurance offering decisions of

firms with 50 or fewer employees (small firms), a sector that is particularly vulnerable

to potential problems regarding health insurance financing. We use data from

the 2008 Medical Expenditure Panel Survey–Insurance Component (MEPS-IC) and

the National Association of Health Underwriters (NAHU) to examine whether the

structure of the market for health insurance agents/brokers that serve small firms is

related to the probability that small firms offer insurance and the premiums of plans

offered. Specifically, we test the predictions from search theory that small firms in

more competitive agent/broker markets will be more likely to offer insurance and to