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Improving Value

Increase Competition Among Health Plans

The amount of health plan competition varies tremendously around the country, with more rural areas generally having fewer plans, particularly in the individual or non-group market.1

The impact of health plan competitive environment is closely tied up with the hospital competitive environment. In most markets, hospital market concentration exceeds health plan concentration. In these markets, researchers believe that a more consolidated health plan market can counteract this provider consolidation.2

The competitive landscape becomes even more important for smaller purchasers—small businesses and individuals. Unlike very large payers, these purchasers bring no ability to influence insurer due to their large patient volume—they are essentially price takers.

The Affordable Care Act was intended to enhance competition in the small group and individual markets. Various reforms are designed to give consumers a shot at comparing health plans “apples-to-apples”—giving insurers have more incentive to compete based on value, instead of marketing and low premiums that may or may not translate into inadequate coverage. New subsidies greatly expand demand for insurance, increasing the attractiveness of the market. Furthermore, requiring subsidized enrollees to pay the full difference between higher-cost plans and the benchmark plan should lead to strong competition among insurers. New pooling and rating rules mean a much more level playing field for health plans.

Further, the new Marketplaces or exchanges have a lot of latitude in how they operate. States with fewer insurers and less competition (or perhaps inadequate rate review may lean towards a more active purchaser approach, using the purchasing power of an exchange to counteract the market power of one or a few large insurers. On the other hand, in a state with just one dominant insurer, it could be difficult for an exchange to threaten excluding that insurer from participating in the exchange. An approach that might be used in these situations is to institute a public option.

In general, the ACA reforms seem to working. A surge in health insurer competition appears to be helping restrain premium increases around the country, with prices dropping in many places due to newcomers offering less expensive plans,3 But researchers say that there is substantial room for further research on how competition affects pricing and other outcomes in this market.4

Notes

1. http://kff.org/other/state-indicator/market-share-and-enrollment-of-largest-three-insurers-individual-market/
2. Glenn A. Melnick, Yu-Chu Shen and Vivian Yaling Wu, “The Increased Concentration of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices,” Health Affairs (September 2011).
3. Jordan Rau and Julie Appleby, "Competition Means Some Obamacare Obamacare Premiums Rising Little in 2015," Washington Post (Nov. 28, 2014).
4. More Insurers Lower Premiums: Evidence from Initial Pricing in the Health Insurance Marketplaces, Leemore Dafny, Jonathan Gruber, Christopher Ody, NBER Working Paper No. 20140, Issued in May 2014, http://www.nber.org/papers/w20140