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Market Power and Firm Strategies in Health Insurance

Paper Session

Friday, Jan. 4, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, 304
Hosted By: American Society of Health Economists
  • Chair: Kate Ho, Princeton University

In-kind Transfers, Tagging, and Market Power: Evidence from the ACA

Maria Polyakova
,
Stanford University
Stephen P. Ryan
,
Washington University-St. Louis

Abstract

Public welfare programs have a long history of linking their benefits to observable characteristics of potential recipients, such as age, income, or employment status. We argue that this common mechanism, tagging, whose goal it is to improve efficiency with better targeting of in-kind transfers, may lead to substantial market distortions in an environment where the final good is provided to recipients by strategic private firms. The efficiency losses may be exacerbated when the level of transfers that subsidize the purchase of the good is anchored to the price information supplied by these firms. We explore this possibility empirically, using data on Health Insurance Marketplaces that were created in 2014 under the Affordable Care Act. We build a model of supply and demand in this new market. The estimated model primitives allow us to analyze the efficiency of market equilibria and the incidence of subsidies under the observed subsidy regime with tagging, as well as under counterfactual subsidization mechanisms.

Multimarket Contact in Health Insurance: Evidence from Medicare Advantage

Haizhen Lin
,
Indiana University
Ian McCarthy
,
Emory University

Abstract

Many industries, including health insurance, are characterized by a handful of large firms that compete in multiple geographic markets. Such overlap across markets, defined as multimarket contact (MMC), may facilitate tacit collusion and thus reduce the intensity of competition. We examine the effects of MMC on health insurance prices and quality using comprehensive data on the Medicare Advantage (MA) market from 2008 through 2015. Our estimation strategy exploits two plausibly exogenous changes to MMC: 1) a merger-induced change in MMC due to consolidations in other markets; and 2) reimbursement policy changes in which benchmark rates were increased in a subset of markets, encouraging additional entry into those markets and therefore affecting MMC even in markets otherwise unaffected by the policy itself. Across a range of estimates and alternative measures of MMC, our results consistently support the mutual forbearance hypothesis, where we find that prices are significantly higher and quality significantly lower as MMC increases. These results suggest MMC as one potential channel through which cross-market mergers and acquisitions could soften competitiveness in local markets.

How Important Is Price Variation Between Health Insurers?

Stuart Craig
,
University of Pennsylvania
Keith Marzilli Ericson
,
Boston University
Amanda Starc
,
Northwestern University

Abstract

Prices negotiated between payers and providers affect a health insurance contract's value via enrollees’ cost-sharing and self-insured employers’ costs. However, price variation across payers is hard to observe. We measure negotiated prices for hospital-payer pairs in Massachusetts and characterize price variation. Between-payer price variation is similar in magnitude to between-hospital price variation. Moreover, administrative-services-only contracts, in which insurers do not bear risk, have higher prices. We model negotiation incentives and show that contractual form and responsiveness to negotiated prices when purchasing insurance are important determinants of negotiated prices. Finally, we show how price variation translates into expected out-of-pocket costs.

Health Insurance Menu Design: Managing the Spending-Coverage Tradeoff

Kate Ho
,
Columbia University
Robin Lee
,
Harvard University

Abstract

The high current level of U.S. health care spending is a key issue for the federal government, for states, and for employers. This paper considers the issue from the point of view of a large self-insured employer. We ask how employers can design their health insurance plan menus to control health care spending while also safeguarding employee welfare.

High-deductible health plans have been shown to reduce medical spending, but recent papers indicate that enrollees may cut back on medical utilization (Brot-Goldberg et al 2017), with possible adverse implications for health outcomes and consumer welfare. However, other papers suggest that if a low-coverage plan is offered as part of a choice set, consumer selection based on sickness level and preferences can limit the impact on outcomes as well as the cost savings achieved (Einav et al 2013). Further, if a choice of heterogeneous plans is offered, premiums need to be designed carefully in order to avoid an adverse selection “death spiral” (Cutler and Reber 1998). We consider these issues in the context provided by Harvard University’s choice of plan offerings to its employees.

In 2015, Harvard added two high-deductible health plans to its menu of options that differed by coverage level, plan type and network breadth. We observe data on plan characteristics, enrollment, and medical claims in the period 2014-16. We develop and estimate a model of health insurance plan choice and health care utilization that builds on recent literature and use it to characterize plan selection on preferences and sickness level and the resulting enrollee spending and welfare. We use the estimates to explore the optimal employer offering, if the objective function is a weighted sum of employee surplus and employer spending, and premiums are determined as a fixed markup over medical costs (as for a self-insured plan).
Discussant(s)
Mark Shepard
,
Harvard University
Leemore Dafny
,
Harvard University
Pietro Tebaldi
,
University of Chicago
Neale Mahoney
,
University of Chicago
JEL Classifications
  • I1 - Health
  • L1 - Market Structure, Firm Strategy, and Market Performance