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. 3 Things to Keep in Mind When Delivering Negative Feedback
    First, understand the purpose of the conversation, which is trickier than it sounds.
  2. Podcast: Workers Are Stressed Out. Here’s How Leaders Can Help.
    On this episode of The Insightful Leader: You can’t always control what happens at work. But reframing setbacks, and instituting some serious calendar discipline, can go a long way toward reducing stress.
  3. What Went Wrong at Silicon Valley Bank?
    And how can it be avoided next time? A new analysis sheds light on vulnerabilities within the U.S. banking industry.
    People visit a bank
  4. 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
  5. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  6. Leaders, Don’t Be Afraid to Admit Your Flaws
    We prefer to work for people who can make themselves vulnerable, a new study finds. But there are limits.
    person removes mask to show less happy face
  7. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  8. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  9. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  10. At Their Best, Self-Learning Algorithms Can Be a “Win-Win-Win”
    Lyft is using ”reinforcement learning” to match customers to drivers—leading to higher profits for the company, more work for drivers, and happier customers.
    person waiting for rideshare on roads paved with computing code
  11. When You’re Hot, You’re Hot: Career Successes Come in Clusters
    Bursts of brilliance happen for almost everyone. Explore the “hot streaks” of thousands of directors, artists and scientists in our graphic.
    An artist has a hot streak in her career.
  12. 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
  13. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  14. Take 5: Tips for Widening—and Improving—Your Candidate Pool
    Common biases can cause companies to overlook a wealth of top talent.
  15. Why Well-Meaning NGOs Sometimes Do More Harm than Good
    Studies of aid groups in Ghana and Uganda show why it’s so important to coordinate with local governments and institutions.
    To succeed, foreign aid and health programs need buy-in and coordination with local partners.
  16. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  17. How Peer Pressure Can Lead Teens to Underachieve—Even in Schools Where It’s “Cool to Be Smart”
    New research offers lessons for administrators hoping to improve student performance.
    Eager student raises hand while other student hesitates.
  18. How Much Do Campaign Ads Matter?
    Tone is key, according to new research, which found that a change in TV ad strategy could have altered the results of the 2000 presidential election.
    Political advertisements on television next to polling place
  19. Take 5: How Fear Influences Our Decisions
    Our anxieties about the future can have surprising implications for our health, our family lives, and our careers.
    A CEO's risk aversion encourages underperformance.
More in Policy