Paying a Premium on your Premium

We examine whether and to what extent consolidation in the U.S. health insurance industry is leading to higher employer-sponsored insurance premiums. We make use of a proprietary, panel dataset of employer-sponsored healthplans enrolling over 10 million Americans annually between 1998 and 2006 to explore the relationship between premium growth and changes in market concentration. We exploit the differential impact of a large national merger of two insurance firms across local markets to estimate the causal effect of concentration on market-level premiums. We estimate real premiums increased by 2.8 percentage points (in a typical market) due to the rise in concentration during our study period. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis a vis physicians, whose absolute employment and relative earnings decline in its wake. e-mail addresses: [email protected], [email protected], [email protected] We are grateful for helpful comments by Michael Chernew, Julie Cullen, Roger Feldman, Alan Sorensen, seminar participants at American University, Brown University, Dartmouth College, the Department of Justice, Ohio State University, University of Rochester, University of Michigan, and participants at the American Economic Association Annual Meetings, International Industrial Organization Conference, the American Society of Health Economists Conference, the University of British Columbia Summer Industrial Organization Conference, the Searle Center Symposium on Antitrust Economics and Policy, and the NBER Summer Institute. We thank Michael Chernew, Jose Guardado, Woolton Lee, and Dennis Scanlon for valuable discussions. Dafny gratefully acknowledges funding from The Searle Center on Law, Regulation, and Economic Growth at the Northwestern University School of Law. Although the vast majority of healthcare expenditures in the U.S. are funneled through the health insurance industry, few researchers have examined whether the industry itself is contributing to rising health insurance premiums. This possibility has become ever more salient as consolidations continue in this highly-concentrated sector. In 2001, the American Medical Association (AMA) reported nearly half of the 40 largest Metropolitan Statistical Areas (MSAs) were “highly concentrated,” using the Horizontal Merger Guidelines cutoff of HHI > 1,800. By 2008, the AMA expanded its annual report to include 314 geographic areas (mainly MSAs), 94 percent of which were found to be highly concentrated. During the same period (corresponding to data years 2000 and 2006), the average premium for a family of four receiving coverage through an employer rose 81 percent, reaching $11,480 in 2006. This study examines whether there is a causal link between changes in market concentration and growth in health insurance premiums. From a theoretical standpoint, both the sign and the magnitude of the effect of concentration on insurance premiums are ambiguous. On the one hand, increases in market concentration may allow health insurers to raise their markups, leading to higher premiums. On the other hand, increases in market share may strengthen insurers’ bargaining positions vis a vis healthcare providers, leading to reduced outlays and lower premiums. In addition, there are many potential sources of efficiency gains from consolidation, including economies of scale in IT investing and disease management programs, which would also reduce costs and optimal premiums. The net effect on insurance premiums is an empirical question. The key challenges to empirically estimating such a link are adequate data and exogenous variation in market concentration. Comprehensive data on healthplans is extremely difficult to obtain because contracts are customized for each buyer across many different dimensions, renegotiated annually, and considered highly confidential. In addition, premiums vary based on the demographics, health risks, and expenditure history (or “experience”) of the insured 1 “Competition in Health Insurance: A Comprehensive Study of U.S. Markets,” American Medical Association, 2001 and 2008. HHI is calculated for the combined HMO and PPO product market. Estimates are not strictly comparable over time due to changes in methodology and sample selection. For example, self-insured HMOs are generally included in 2001 but excluded in 2008. 2 Premiums include both employer and employee contributions. Source: Employer Health Benefits Summary of Findings, 2000 and 2006, Kaiser Family Foundation/Health Research and Educational Trust Survey, http://ehbs.kff.org/. 3 Rent transfers from providers to insurers are not efficiency gains, although they may reduce premiums.