The answer: sometimes. A study by Dafny (2009) finds that in markets with ten or more insurers, markets do seem to be competitive. However, with six or less insurers, health insurers do have some market power due to switching costs.
“Using data on ‘fully insured’ health plans offered to employees of 184 publicly-held firms in over 100 geographic markets in the United States for the years 1998 to 2005, she finds that increases in company profits are associated with increases in health insurance premiums, but only in geographic markets served by fewer than ten major insurance carriers. In the most concentrated markets — those with six or fewer carriers — a 10 percent increase in company profits is associated with a 1.2 percent increase in health insurance premiums..
Further analysis suggests that in order to get lower rates, employers must be willing to change health plans. A plan switch is a ‘tough sell’ in good times because employees must identify in-network providers, transfer medical records, and figure out the claims reimbursement system. The data reveal that employers are ‘especially reluctant to drop health plans when profitable, a finding that supports the hypothesis that profits act to raise employers’ switching costs.’”
I would predict that integrated health IT and more regulation of minimum benefit levels could reduce switching costs. However, increased minimum benefit levels will also drive up premiums. I predict that switching out of integrated health delivery systems such as Kaiser Permanente would involve much higher switching costs for employees, since most Kaiser doctors are employed directly by the insurance company. Thus, the patients would have to switch primary care providers (PCP) if their employer changed coverage. On the other hand, switching between PPOs or less integrated HMOs might involve less switching costs since a patient’s PCP likely would accept insurance from a variety of health plans.