Working Paper: NBER ID: w14572
Authors: Leemore Dafny
Abstract: Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently face higher premium growth, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers' switching costs, and insurers exploit this inelasticity where they have sufficient bargaining power. Given the rapid industry consolidation during the study period, these findings suggest healthcare insurers possess and exercise market power in an increasing number of geographic markets.
Keywords: Health insurance; Market power; Premiums; Competition
JEL Codes: I11; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher health insurance premiums (G52) | Rent extraction behavior of insurers (G52) |
| Fewer insurance carriers (G52) | Higher rent extraction (R21) |
| Switching costs and reluctance to change plans (D91) | Rent extraction (R21) |
| Positive profit shocks (E32) | Higher health insurance premiums (G52) |
| Positive profit shocks (E32) | Increased premiums in concentrated markets (D49) |