More Insurers, Lower Premiums?
Skip to content
Policy Strategy Jul 7, 2014

More Insurers, Lower Premiums?

Evidence from U.S. health insurance marketplaces.

Yevgenia Nayberg​

Based on the research of

Leemore S. Dafny

Jonathan Gruber

Christopher Ody

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.

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 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.

“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.”

About the Writer
Sachin Waikar is a freelance writer based in Evanston, Illinois.
About the Research

Dafny, Leemore, Jonathan Gruber, and Christopher Ody. More Insurers Lower Premiums: Evidence from Initial Pricing in the Health Insurance Exchanges. 2014. Submitted to the inaugural issue of the American Journal of Health Economics.  Also recently issued as NBER Working Paper 20140.

Read the original

Most Popular This Week
  1. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  2. Don’t Wait to Be Asked: Lead
    A roadmap for increasing your influence at work.
    An employee leads by jumping from the bleachers and joining the action.
  3. How (Not) to Change Someone’s Mind
    Psychologists have found two persuasion tactics that work. But put them together and the magic is lost.
    A woman on a street talks through a large megaphone.
  4. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  5. How Autocracies Unravel
    Over time, leaders grow more repressive and cling to yes-men—a cycle that’s playing out today in Putin’s Russia.
    autocrat leaning over battle map surrounded by yes-men.
  6. Knowing Your Boss’s Salary Can Make You Work Harder—or Slack Off
    Your level of motivation depends on whether you have a fair shot at getting promoted yourself.
    person climbin ladder with missing rungs toward rich boss surrounded by money bags on platform
  7. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  8. It’s Performance Review Time. Which Ranking System Is Best for Your Team?
    A look at the benefits and downsides of two different approaches.
    An employee builds a staircase for his boss.
  9. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  10. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  11. Four Strategies for Cultivating Strong Leaders Internally
    A retired brigadier general explains how companies can prioritize talent development.
    Companies should adopt intentional leadership strategies since developing leaders internally is critical to success.
  12. Take 5: Not So Fast!
    A little patience can lead to better ideas, stronger organizations, and more-ethical conduct at work.
  13. Too Much Cross Talk. Too Little Creativity. How to Fix the Worst Parts of a Virtual Meeting.
    Six tools from an unlikely place—improv comedy—to use on your next Zoom call.
    meeting participants improv
  14. Take 5: How to Be Prepared for Important Career Moments
    Expert advice on getting ready to network, negotiate, or make your case to the CEO.
    How to be prepared
  15. Entrepreneurship Through Acquisition Is Still Entrepreneurship
    ETA is one of the fastest-growing paths to entrepreneurship. Here's how to think about it.
    An entrepreneur strides toward a business for sale.
  16. Why Do Long Wars Happen?
    War is a highly inefficient way of dividing contested resources—yet conflicts endure when there are powerful incentives to feign strength.
    long line of soldiers marching single file through a field
  17. 5 Tips for Growing as a Leader without Burning Yourself Out
    A leadership coach and former CEO on how to take a holistic approach to your career.
    father picking up kids from school
  18. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  19. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
More in Business Insights Finance & Accounting