A new study by the School of Public Health shows that competition drives down premium costs in federal health insurance marketplaces.
The study was authored by Associate Professor Jean Abraham and PhD student Coleman Drake and published in the International Journal of Health Economics and Management. Jeffrey McCullough from the University of Michigan, and Kosali Simon from Indiana University also contributed to the study.
“The success of the health insurance marketplaces has been mixed,” says Drake. “Some states, like California, have competitive marketplaces with low premiums; others like Alabama have monopolist insurers with high prices. In some cases, such as Texas, the success of the marketplaces varies from county to county. We wanted to understand what motivates insurer participation in the marketplaces and how insurers price their products when faced with competition.”
The researchers studied how competition for customers and variances in the general and administrative costs of insurance firms relates to premiums in 36 states using the Federally Facilitated Marketplace in 2016.
The study showed that as competition between insurers increased in the marketplaces, premiums fell. The decrease amounted to an average of 4 percent with each insurer that entered the market.
“The largest gains from competition occur with entry of the fourth insurer into a market (for example, a county). That is, we see a substantial premium reduction when at least four insurers compete with one another,” says Drake.
The results also suggest that state-specific policies like Medicaid expansion, the elimination of grandfathered plans, and outreach efforts may have substantial influence on the health of state marketplaces. In terms of health policy, researchers note their findings highlight the effect that an insurer’s exit from marketplaces could have on consumer choice, affordability, and government spending.
“Despite numerous regulations, the marketplaces behave like a normal market: competition reduces prices,” says Drake. “The marketplaces can provide affordable insurance — and cost less to the government — if state-level health policy is conducive to insurer participation in the individual health insurance market. Policymakers interested in restructuring the individual health insurance market to increase affordability should consider how new policies will have an impact on the size and composition of the individual health insurance market to encourage robust insurer competition.”