Typically, most economists believe that increased competition decreases prices. However, is that the case for competition among health insurers?
On the one hand, competition among health insurers could decrease prices if consumers choose plans based on premiums. Competition may increase insurer’s incentive to negotiate with providers and may force insurers to make lower margins or lower administrative costs. On the other hand, if there are fewer insurers, each insurer will have more leverage over providers–particularly where there are few providers in a market such as the case of hospitals.
We use detailed California admissions, claims, and enrollment data from a large benefits manager to estimate our model and simulate the removal of an insurer from consumers’ choice sets. Although premiums rise and annual consumer surplus falls by $50-120 per capita, hospital prices and spending fall in certain markets as remaining insurers negotiate lower rates. Overall, the impact on negotiated prices is heterogeneous, with increases or decreases of up to 15% across markets. We conclude that insurer competition can increase consumer surplus but also generate a redistribution of rents across hospitals and greater medical spending in certain markets.
The study by Ho and Lee find that in some markets–especially complex markets such as health care–competition may not always operate purely in a neoclassical sense.