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

By Leemore Dafny, Jonathan Gruber, Christopher Ody
The National Bureau of Economic Research, NBER Working Paper No. 20140, May 2014

Abstract

First-year insurer participation in the Health Insurance Marketplaces (HIMs) established by the Affordable Care Act is limited in many areas of the country. There are 3.9 participants, on (population-weighted) average, in the 395 ratings areas spanning the 34 states with federally facilitated marketplaces (FFMs). Using data on the plans offered in the FFMs, together with predicted market shares for exchange participants (estimated using 2011 insurer-state market shares in the individual insurance market), we study the impact of competition on premiums. We exploit variation in ratings-area-level competition induced by United Healthcare’s decision not to participate in any of the FFMs. We estimate that United’s nonparticipation decision raised the second-lowest-price silver premium (which is directly linked to federal subsidies) by 5.4 percent, on average. If all insurers active in each state’s individual insurance market in 2011 had participated in all ratings areas in that state’s HIM, we estimate this key premium would be 11.1% lower and 2014 federal subsidies would be reduced by $1.7 billion.

From the Conclusion:

Given the incipiency of these markets, this study is but a first step in what will surely become a deeper and broader literature on insurance exchanges and the nature and significance of competition among exchange participants. There is substantial room for further research on how competition affects pricing and other outcomes in this market. Future studies will be easier to execute once information about consumer enrollment decisions has been released, and once the market is in longer-term equilibrium. These conditions will allow researchers to apply well- established supply-side methodologies to studying competition on the exchanges. Such research will permit more-nuanced conclusions and recommendations regarding the impact of competition and competition-related policies on various outcomes of interest. Given the large federal role in developing and regulating the exchanges, and in subsidizing the purchase of plans offered on the exchanges, research on how competition affects consumer choice and insurer behavior is of critical importance.

http://www.nber.org/papers/w20140

****

Comment:

By Don McCanne, MD

This study makes an attempt to support the theory that as the number of competing insurers increases within each of the 395 ratings areas for federally facilitated marketplaces, the premiums decrease. Though the title is quite clear that “more insurers lower premiums,” the actual data are quite fuzzy.

If you look at Figure 2 in the report, there is considerable scatter around the weighted regression line, and if you eliminate just a few of the outliers from the 395 ratings areas, there is no obvious correlation between numbers of insurers and premiums.

Nevertheless, to make their point they used two what-ifs. They project that premiums for the second lowest cost silver plan were 5.4 percent higher than they would have been simply because one insurer – United Healthcare – declined to offer plans through the exchanges. Further, they project that if all insurers already active in each rating area were to participate in the exchanges then the premium for this silver plan would have been 11.1 percent lower. It seems to be a leap to state that competition has been shown to be successful in lowering premiums because it would have been so with other competitors participating in the exchanges even though those other competitors did not actually participate. At least it demonstrates an unwavering belief in the competition theory being tested, which really wasn’t tested, but, what if?

Of greater concern is their concluding comment. They state, “There is substantial room for further research on how competition affects pricing and other outcomes in this market.” Also, “Given the large federal role in developing and regulating the exchanges, and in subsidizing the purchase of plans offered on the exchanges, research on how competition affects consumer choice and insurer behavior is of critical importance.”

Jonathan Gruber, who helped develop both the Massachusetts plan and the Affordable Care Act, is a co-author of this NBER paper. He had told us that the proven model of single payer had to be rejected because of lack of political feasibility, yet in its place we had to adopt a model using health plan competition – a model that needs further research to see how it will affect consumer choice and insurer behavior. What? We enact this for the entire nation, and then we’ll see how it works?

Actually we do not need further research on private insurance plans competing within an exchange. We have had decades of experience with the Federal Employees Health Benefits Program, and with California’s CalPERS for public employees and the Pacific Business Group on Health for employer-sponsored plans. Each of these exchanges offered a choice of competing private plans. Yet health care costs continued to escalate at intolerable rates. Plans competing within exchanges have not been effective in slowing health care inflation to levels found in other nations.

The authors contend that more research on health plan competition is of “critical importance.” Baloney. We’ve had all the research we need on health plan competition. What we need is to get rid of the private health plans, fix Medicare, and then provide it to everyone. Now.

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

By Leemore Dafny, Jonathan Gruber, Christopher Ody
The National Bureau of Economic Research, NBER Working Paper No. 20140, May 2014

Abstract

First-year insurer participation in the Health Insurance Marketplaces (HIMs) established by the Affordable Care Act is limited in many areas of the country. There are 3.9 participants, on (population-weighted) average, in the 395 ratings areas spanning the 34 states with federally facilitated marketplaces (FFMs). Using data on the plans offered in the FFMs, together with predicted market shares for exchange participants (estimated using 2011 insurer-state market shares in the individual insurance market), we study the impact of competition on premiums. We exploit variation in ratings-area-level competition induced by United Healthcare’s decision not to participate in any of the FFMs. We estimate that United’s nonparticipation decision raised the second-lowest-price silver premium (which is directly linked to federal subsidies) by 5.4 percent, on average. If all insurers active in each state’s individual insurance market in 2011 had participated in all ratings areas in that state’s HIM, we estimate this key premium would be 11.1% lower and 2014 federal subsidies would be reduced by $1.7 billion.

From the Conclusion:

Given the incipiency of these markets, this study is but a first step in what will surely become a deeper and broader literature on insurance exchanges and the nature and significance of competition among exchange participants. There is substantial room for further research on how competition affects pricing and other outcomes in this market. Future studies will be easier to execute once information about consumer enrollment decisions has been released, and once the market is in longer-term equilibrium. These conditions will allow researchers to apply well- established supply-side methodologies to studying competition on the exchanges. Such research will permit more-nuanced conclusions and recommendations regarding the impact of competition and competition-related policies on various outcomes of interest. Given the large federal role in developing and regulating the exchanges, and in subsidizing the purchase of plans offered on the exchanges, research on how competition affects consumer choice and insurer behavior is of critical importance.

http://www.nber.org/papers/w20140

This study makes an attempt to support the theory that as the number of competing insurers increases within each of the 395 ratings areas for federally facilitated marketplaces, the premiums decrease. Though the title is quite clear that “more insurers lower premiums,” the actual data are quite fuzzy.

If you look at Figure 2 in the report, there is considerable scatter around the weighted regression line, and if you eliminate just a few of the outliers from the 395 ratings areas, there is no obvious correlation between numbers of insurers and premiums.

Nevertheless, to make their point they used two what-ifs. They project that premiums for the second lowest cost silver plan were 5.4 percent higher than they would have been simply because one insurer – United Healthcare – declined to offer plans through the exchanges. Further, they project that if all insurers already active in each rating area were to participate in the exchanges then the premium for this silver plan would have been 11.1 percent lower. It seems to be a leap to state that competition has been shown to be successful in lowering premiums because it would have been so with other competitors participating in the exchanges even though those other competitors did not actually participate. At least it demonstrates an unwavering belief in the competition theory being tested, which really wasn’t tested, but, what if?

Of greater concern is their concluding comment. They state, “There is substantial room for further research on how competition affects pricing and other outcomes in this market.” Also, “Given the large federal role in developing and regulating the exchanges, and in subsidizing the purchase of plans offered on the exchanges, research on how competition affects consumer choice and insurer behavior is of critical importance.”

Jonathan Gruber, who helped develop both the Massachusetts plan and the Affordable Care Act, is a co-author of this NBER paper. He had told us that the proven model of single payer had to be rejected because of lack of political feasibility, yet in its place we had to adopt a model using health plan competition – a model that needs further research to see how it will affect consumer choice and insurer behavior. What? We enact this for the entire nation, and then we’ll see how it works?

Actually we do not need further research on private insurance plans competing within an exchange. We have had decades of experience with the Federal Employees Health Benefits Program, and with California’s CalPERS for public employees and the Pacific Business Group on Health for employer-sponsored plans. Each of these exchanges offered a choice of competing private plans. Yet health care costs continued to escalate at intolerable rates. Plans competing within exchanges have not been effective in slowing health care inflation to levels found in other nations.

The authors contend that more research on health plan competition is of “critical importance.” Baloney. We’ve had all the research we need on health plan competition. What we need is to get rid of the private health plans, fix Medicare, and then provide it to everyone. Now.