Session: Health Insurance Markets
Room: Upson 215
Time: Tue 10:15-11:45

Presenter: Rexford Santerre (University of Connecticut. Finance)

Discussant: Cagatay KocFederal Trade Commission

Abstract

During the health care reform debates, many policy-makers have pointed to a noncompetitive health insurance is the U.S. However, only a handful of studies have empirically examined if health insurers actually possess market power in either their output or input markets. As a result, this study uses a panel data set of the 50 states and Washington D.C. over the years from 2000 to 2007 to investigate the effects of health-insurer market concentration. Data from the National Association of Insurance Commissioners are used to generate a health insurer Herfindahl-Hirschman Index (HHI) for each state-year observation.

More specifically, this study examines how the health-insurer HHI at the state level influences premium volume, percent of the population with either individually-purchased or employer-provided insurance, measures of hospital output, and measures of the prices and employment levels of various medical inputs such as doctors and nurses. Two stage least squares estimates are derived given the endogeneity of market concentration by using large merger-induced changes in concentration. Control variables include income, population, hospitals per capita, firms per capita, and firm-size distribution along with many other demographic variables such as education, age, race, and poverty.

The empirical results find that health insurers exercise market power on the seller-side of the health insurance marketplace but the restriction of output only takes place in the individually-purchased market segment. Simulations suggest that an increase of the health-insurer HHI by 200 points results in 700,000 individuals losing individually-purchased health insurance. Premium volume rises as a result given an inelastic demand for health insurance. In addition, the findings imply that health insurers practice monopsony power in the market for general practitioners. In particular, a 200 point increase in the health-insurer HHI reduces the number of general practitioners by as much as 9 percent according to the results. In contrast, hospital output appears to be unaffected by greater health insurer concentration probably because large hospitals have more market power than general practitioners.

Consequently, policy-makers should promote more competition in health insurance markets by allowing interstate purchasing of health insurance and more actively enforcing antitrust laws against large mergers among health insurers.

Key Terms

health insurance, monopoly, monopsony

Authors:

Laurie Bates (Bryant University. Economics) , James Hilliard (University of Georgia. Insurance, Legal Studies and Real Estate) and Rexford Santerre (University of Connecticut. Finance)