It is usually argued that market concentration leads to higher prices. This well-known proposition has led to concern about the level of concentration in state health-insurance markets, since the largest insurer in many states has a market share greater than 50 %. Moreover, the data compiled by the American Medical Association indicates that insurance markets have become more concentrated over the last ten years. Thus, some have suggested that health insurance premiums would decrease significantly if state markets were made more competitive. This paper explores that proposition through a computational model and an empirical analysis of the relationship between the market share of the largest firm in a state and the average health insurance premium in that state.
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Also, neither of these studies addresses the effect of dominance by a not-for-profit firm.
Since a NFP firm is not a profit maximizer, C(q) may not be the minimum cost of providing q policies. However, all that matters is that NFP firms will adjust output as the price set by the dominant firm changes, in order not to operate at a loss.
The market demand for insurance policies may decrease as price increases because individuals choose to go uninsured or because firms choose to self-insure their employees.
Insurers typically offer a number of different policies. Thus, our model should be thought of as speaking to the effect of market concentration on one segment of the health insurance model.
There is evidence that health insurance is purchased in much more localized markets. Thus, if a provider is only participating in selected local markets, statewide market shares could underestimate the amount of concentration in health insurance markets.
2005 is the midpoint of the time period over which our regression analysis is conducted. Note that the 2007 update contains 2005 data, etc.
In nine of these 26 states the largest provider is WellPoint, a BCBS affiliate that is FP.
American Medical Association, Competition in health insurance: A comprehensive study of U.S. markets, 2003, 2005, 2007, 2009, and 2010 updates. There were no updates in 2004 and 2005. The data in the 2008 update was not used since the premium data we use in the regression analysis is not available for 2007.
This data also came from the Bureau of Economic Analysis.
The results indicate the presence of fixed effects. The test statistic is 215.14 and is distributed Chi-squared with 3 degrees of freedom.
Robust standard errors are “asymptotically valid in the presence of heteroskedasticity, including homoscedasticity.”
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We thank an anonymous referee for his or her comments, which improved the quality of the paper. We alone are responsible for any errors.
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Alexander, D.L., Neill, J. The Impact of Market Share on Health Insurance Premiums. Atl Econ J 43, 477–488 (2015). https://doi.org/10.1007/s11293-015-9471-5