Paying a Premium on Your Premium? Consolidation in the US Health Insurance Industry

Abstract

We examine whether and to what extent consolidation in the US health insurance industry has contributed to higher employer-sponsored insurance premiums. We exploit the differential impact across local markets of a national merger of two insurers to identify the causal effect of concentration on premiums. Using data for large groups, we estimate premiums in average markets were approximately seven percentage points higher by 2007 due to increases in local concentration from 1998–2006. We also find evidence consolidation facilitates the exercise of monopsonistic power vis-à-vis physicians, leading to reductions in their absolute employment and earnings relative to other healthcare workers. JEL: G22, I13

How do health insurer market concentration and bargaining power with hospitals affect health insurance premiums?

“…Using a proprietary dataset containing information about the insurance benefits offered by large employers between 1998 and 2005, she utilizes variation in the profitability of these large employers to illustrate that insurers in concentrated insurance markets impose higher premium increases on more profitable employers (assumed to be less price sensitive). Dafny et al (2012) observe a positive effect of insurer consolidation on health insurance premiums by exploiting the 1999 merger of nationwide insurers Aetna and Prudential as a source of differential changes in local insurance market concentration across the country. Using this instrument and the same dataset of large employers as above, they find a significant effect of increases in local insurance market concentration on increases in health insurance premiums.…”

More Insurers Lower Premiums: Evidence from Initial Pricing in the Health Insurance Marketplaces

“…Prior empirical research finds that insurer consolidation has led to higher premiums for large employer-sponsored plans (Dafny, Duggan, and Ramanarayanan 2012) and fully insured, small-group plans (Guardado, Emmons, and Kane 2013). The degree and nature of competition, and hence the quantitative relationship between market structure and premiums, may be different in the HIMs.…”

“…Thus, ratings areas are natural market definitions for insurance offered through exchanges. 6 There are a number of additional reasons why extrapolating from Dafny, Duggan, and Ramanarayanan (2012) to our scenario is difficult. For example, they study the large-group market, and the initial level of concentration in these markets during their study period is significantly lower.…”

“…A number of recent studies show that imperfect competition in various US health insurance markets leads to higher premiums. These include Starc (2014) for the Medigap market, Ericson and Starc (2012b) for the Massachusetts health insurance exchange, Dafny, Duggan, and Ramanarayanan (2012) for the large employer market, and Guardado, Emmons, and Kane (2013) for the fully insured, small-employer market. Starc predicts that entry of a single additional large insurer would reduce the enrollment-weighted Medigap premium by 21 percent and expand the market by 50 percent.…”

“…They find that pricing exceeds the levels predicted under perfect competition. Dafny, Duggan, and Ramanarayanan (2012) quantify the impact of market concentration (as measured by HHI) on premium growth in the large-group segment, instrumenting for concentration using the predicted change in local market HHI generated by a large, national merger in 1999. This merger had varying impacts on local markets owing to differences in the market shares and geographic overlap of the merging firms.…”