Are Health Insurance Markets Competitive?

Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group insurance industry, I investigate whether health insurers successfully negotiate higher premiums for employers with deeper pockets. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently pay higher premiums, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers' switching costs, and insurers exploit this inelasticity in markets where they have sufficient bargaining power. Collectively, the results imply a combination of switching costs and bargaining power of insurers yields uncompetitive outcomes in an increasing number of local markets.