The Effect of Insurance Competition on Health Care Provision
Department of Economics, College of Liberal Arts
University of Minnesota
Competition in health insurance affects not only the price but also the cost-sharing arrangements (e.g. copays and coinsurance rates) of the products offered, but the implications of competition are theoretically ambiguous. For instance, firms may strategically set high levels of cost-sharing to encourage high-risk consumers to purchase a competitor’s product. A merger to monopoly would eliminate this incentive, potentially leading to lower levels of cost-sharing. However, the merger could also increase cost-sharing levels through the standard intuition that more market power leads to higher markups. Moreover, these cost-sharing terms determine the out-of-pocket price of medical care and ultimately affect medical consumption. An increase in cost-sharing will reduce total cost through lower medical consumption, but also reduces consumer welfare through higher out-of-pocket expenses, and potentially reduces consumer health. In this presentation, I estimate a model of insurance competition and medical consumption using detailed, panel data on linked insurance plan and medical consumption choices in Medicare Advantage in Massachusetts. I present the effect of three hypothetical mergers between the three largest firms on the price and copay for primary care. All three mergers lead to price increases, but the effects on the primary care copay range from a 10% decrease to a 7% increase. These changes cause between a $7.3 million increase and a $7.1 million decrease in health care spending. Descriptive evidence on mortality and estimates of the value of a statistical life suggest that the mergers which increase the primary care copay will decrease total welfare, and the merger that decreases the copay will increase total welfare.
HPM Seminar Series is sponsored by the Division of Health Policy & Management, School of Public Health, University of Minnesota.