Premiums on the United States health insurance marketplaces have not been as high as projected, but could they have been even lower? According to Leemore Dafny, a professor of management and strategy at the Kellogg School of Management, the answer is a resounding “Yes.” In recent research, Dafny and her colleagues estimate that premiums in the 34 federally facilitated marketplaces (FFMs) would have been 5.4% lower had a single major carrier who shunned the marketplaces chosen to participate. Had every insurer that operated in the individual insurance markets entered the exchanges, the researchers estimate that premiums could have been 11.1% lower.

The link between competition and premiums is important for both consumers and the federal government, which subsidizes a portion of the premiums for most participants.

“We thought it would be interesting to see how the degree of competition on the exchanges affected prices.”

The insurance competition-pricing relationship is of particular interest to Dafny, who recently completed her tenure as the U.S. Federal Trade Commission’s first Deputy Director for Healthcare and Antitrust. For over a decade she has led studies of consolidation and competition in U.S. health care markets, including hospitals, dialysis, and insurance. In one recent study, Dafny and her coauthors showed that consolidation among insurers has increased premiums for large employer-sponsored plans.

So she and colleagues Christopher Ody, a research assistant professor of management and strategy at the Kellogg School, and Jonathan Gruber, a professor of economics at MIT and a major contributor to the insurance exchanges’ design, were especially interested in pricing on the exchanges. “We thought it would be interesting to see how the degree of competition on the exchanges affected prices,” Dafny says.

Insurance Competition and the U.S. Exchanges
Competitive markets require competitors. Health insurance markets are notorious for being highly concentrated—merger after merger has resulted in markets with only a few dominant players. The insurance exchanges were designed to increase competition by standardizing products to enable easier comparisons and by lowering barriers for new insurer entrants, for instance by providing a centralized website. Participation by incumbents in 2014, the first year of operation, was somewhat limited, however. The 34 federally facilitated marketplaces attracted only 54% of the largest three insurers operating in each state.

Dafny’s prior work has suggested that the low participation in insurance pools was unlikely to be good for consumers or for the government. But two questions remained: Does this relationship hold in exchanges, where competition could be more fierce and plausibly require fewer players to achieve low prices? And if the relationship does hold, how much does limited participation matter?

But the researchers faced a statistical challenge in teasing out the impact of competition: the number and size of insurers is not randomly assigned across markets. Insurers may flock to markets with high expected medical spending, for example, as it may be easier to earn profits through better care management or by offering narrow provider networks. If this were the case, the effect of more insurers on premiums would be understated. Fortunately, Dafny and her coauthors got a big break—a so-called “natural experiment.”

A Study Born of United’s Decision
When UnitedHealthcare, the nation’s largest insurer, decided not to participate in any FFMs, it gave Dafny and colleagues the perfect opportunity to launch their study. “United did the researchers a favor, in this case,” Dafny says.

As expected, the researchers found high concentration in the FFMs, with only 3.9 insurers, on average, in 395 specific geographic areas across 34 states. Some of these insurers were new and unlikely to attract many enrollees. But was United’s absence linked to higher premium prices in those markets? That is, did United’s nonparticipation affect exchange premium prices either directly, based on the pricing it could have offered for its plans, or indirectly, because rivals may otherwise have lowered their premiums to compete with United?

To examine the competition-pricing link, Dafny focused on the second-lowest-price silver plan (2LPS) within each market. These plans have been shown to vary significantly in price nationwide, and federal subsidies are linked to them, so they determine the total amount the government pays. The researchers calculated how much concentration changed in each FFM due to United’s absence, then linked the extent of change to 2LPS premiums.

“In areas where United had formerly been a significant player in the market [based on market share], we found that prices were a good bit higher than in areas where their decision not to participate was of little consequence,” Dafny says. This suggests that had it joined the FFMs, premiums would have been lower. Dafny and her coauthors estimate that United’s participation would have decreased 2LPS premiums by an average of 5.4%. Further, if all insurers active in each state’s individual-insurance market in 2011 had participated in the FFM, the same premium would have been 11.1% lower. In financial terms, full insurer participation would have led to a $1.7 billion reduction in 2014 federal subsidies and a $105.2 billion total reduction over the next 10 years. The finding held up when Dafny and colleagues controlled for other factors that could affect premium levels, including hospital prices and regional demographics like ethnicity, income, and measures of health.

Dafny is quick to caution against making United-specific conclusions based on this research: “This paper is not about UnitedHealthcare. They made a business decision to stay out of the markets, and that enabled us to test the effects of competition on prices in the exchanges in the first year. But a lot of incumbents stayed out of certain markets. It could have been anyone in United’s role.”

Brighter Skies Ahead?
For the public, a major takeaway of Dafny’s findings is that greater competition on the exchanges will likely result in lower prices for consumers. For state and federal regulators, the study highlights the importance of having more insurers on the exchanges. “Premiums were lower than expected,” Dafny says, “but they would have been even lower if they’d gotten more participation.” Active efforts to motivate and retain entrants might include featuring smaller insurers—especially those offering lower premiums—more prominently on the exchange sites, or using such policies as a default for instances when changes in household income cause individuals to shift from Medicaid into subsidized exchange coverage.

While Aetna and some other insurers are sounding warning bells about expanding their exchange participation, United says it is likely to enter more exchanges this year. “It’s a great sign,” Dafny says. “Competition is going to put cash in consumers’ wallets and reduce the taxpayer’s burden.”

Artwork by Yevgenia Nayberg