Less insurer competition can lower hospital prices, but savings may not reach consumers, write Kate Ho and Robin S. Le

Ho, Kate

Lee, Robin S.

LSE Research Online

blogs.lse.ac.uk http://blogs.lse.ac.uk/businessreview/2015/10/05/is-health-insurance-competition-good-for-consumers/Is health insurance competition good for consumers?The dream of many a start-up is having Google or Facebook locked in a bidding war for its technology. Publishers,record labels, and television studios enjoy having both Apple and Amazon competing for their content. And, moregenerally, competition among buyers leads to higher prices for a seller. But when that seller is a hospital orphysician group negotiating prices for its services with an insurance company, it means that increased competitionamong health insurers in the US private health insurance market can actually increase the “costs of care” fornearly two-thirds of Americans.In our research, “Insurer Competition in Health CareMarkets,” we analyse the impact of changes in the level andnature of competition between commercial insurers in the US,such as the introduction of state and federal exchanges,potential consummation of recently proposed insurancemergers, and persistence of alleged non-competeagreements. We disentangle how these changes affect boththe prices insurers pay for medical services and the premiumscharged to consumers.It’s true, as many have argued, that having more insurers in amarket can provide incentives for insurers to reducepremiums and improve quality and efficiency of care as theycompete more fiercely for consumers. It’s also true that whenthe insurance market becomes more competitive, largemedical providers have more leverage to “play” insurers off one another when bargaining to extract higher pricesfor their services, thereby dampening the reduction in premiums that would have occurred had prices remainedconstant. Whether one effect tends to dominate over the other is an open question, and – as we find out –depends critically on features of the market.Our study focuses on the private health insurance market in the state of California (US) and examines the healthinsurance plans offered by CalPERS, a government agency that manages health benefits for over 1.4 millionpublic employees, retirees, and their dependents. During the period of our study, the agency primarily offeredaccess to plans managed by three of the largest insurers in California with a current combined market share ofover 75 percent. We use detailed claims, admissions, enrolment data and information on actual prices negotiatedbetween insurers and providers. We develop and estimate a model of how hospitals bargain with insurers,insurers set premiums, and enrolees choose insurance plans and hospitals when they get sick. Our model allowsus to predict the impact of removing one of the insurers from enrolees’ choice sets.Nuanced scenarioIn our main analysis, we find that when an insurance plan is removed (which we interpret as reducing insurercompetition), premiums are likely to rise by as much as 10 percent, consistent with standard intuition and withprevious studies that, conversely, document premium reductions due to increases in insurer competition.However, we also find that negotiated hospital prices rise significantly in some geographic areas while theyfall in others. Which of the two effects occurs depends on factors such as the relative competitiveness of insurerand hospital markets in these areas. For example, prices are likelier to fall in markets when the insurer that isremoved has a larger market share, as this harms hospitals’ “outside options” when they bargain with theremaining insurers. Our analysis gives credence to the possibility that a merger between large insurers can lead to“cost” savings for them through reduced hospital prices. However, it also highlights the importance of balancingthese lower costs against the potential for larger premium mark-ups  – and the potential for a smaller set ofinsurance products to choose from – which may completely offset the savings to consumers.There are instances in which insurers are constrained in how freely they are able to set premiums – for example, ifemployers are tough negotiators on behalf of their employees or there are effective regulatory policies inplace. We find that in such cases, a reduction in negotiated hospital prices when an insurer is removed may bepassed on to consumers through lower overall premiums.So where does that leave us? Reducing insurer competition can plausibly lead to reductions in hospital prices (ifthe merging or exiting insurers are large enough) but these savings may not be passed along to consumers (ifinsurer premium mark-ups are insufficiently constrained.) We stress that the complicated question of whethermore insurer competition is “good” requires a suitably nuanced answer. In complex markets such as health care,where insurers compete for both medical providers and enrolees, it’s true that competition may be desirable…butit’s important to ask for whom.Featured image credit: 401kcalculator.org CC-BY-2.0 Inside photo credit: Defence Images CC-BY-SA-2.0Kate Ho is an Associate Professor of Economics at Columbia University. She graduated fromHarvard University with a Ph.D. in Business Economics. She also has an M.A. in Mathematicsfrom Cambridge University. Prior to her academic career she spent four years as privatesecretary to the Minister of State for Health in the UK. Professor Ho’s research focuses on theindustrial organization of the medical care market. She has published a number of papers. Herwork has been recognized by the International Health Economics Association (which voted herthe Arrow Award for best paper published in 2009) and the Journal of Applied Econometrics(the Stone Prize for best paper in 2006/7).Robin S. Lee is an assistant professor of economics at Harvard University. His researchinterests are in industrial organization and applied microeconomic theory. His work focuseson bargaining and contracting between firms with market power in bilateral oligopoly, and theimplications of exclusive or selective contracting and integration on industry structure,competition and welfare. Recently, he has examined the impact of insurer competition inhealth care markets on premiums and provider reimbursement rates, and the welfare effectsof vertical integration in content distribution and platform markets. He is a faculty researchfellow at the National Bureau of Economic Research. Copyright © 2015 London School of Economics

Is health insurance competition good for consumers?

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