Winners and Losers from Insurer Competition in the Initial Years of the ACA Marketplaces

Since 2014, as a result of the Affordable Care Act (ACA), non-elderly adults in the U.S. can access online marketplaces to purchase health insurance from private health insurers.  The marketplaces have facilitated enrollment for 10 million individuals, about 85% of whom have received financial assistance.  Because federal subsidies are defined so that the government pays less when insurers offer plans with lower premiums, ACA regulations also encourage insurers to participate in different local markets in order to potentially lower premiums.  However, insurers may compete along dimensions besides premiums, making the effect of competition on prices ambiguous and potentially heterogeneous across different consumers.    

In particular, the total price that consumers pay for healthcare is the combination of their plan’s premium and the amount of cost sharing they are required to contribute toward their medical expenses under the complex and non-linear schedule of their plan. I study the 34 states with federally managed marketplaces, where insurers have considerable latitude to vary pricing schedules even within plans that provide the same actuarial value of benefits.  Instead of competing to offer similar pricing schedules with progressively lower premiums, insurers may thus compete to offer policies with different pricing schedules that progressively cater to profitable consumers. The objective of my analysis is to determine empirically if more insurance competition in the marketplaces leads to more affordable coverage for all consumers or only for certain subsets of consumers.

In the new literature on insurer competition in the marketplaces, Dafny et al. (2015) use the most credible identification strategy to address the potential endogeneity of insurer competition and find that it lowered premiums in 2014.  This paper builds on their work by expanding both the time period and the range of outcomes.  Assessing the effect of insurer competition in both the first and second years of the marketplaces is important because insurer participation nearly doubled over that time.  My outcomes include premiums and out-of-pocket payments for a broad range of hypothetical consumers with varying medical expenses.

My identification strategy differs from Dafny et al. (2015) and exploits local variation in fixed costs for insurers from participating in different markets.  Insurers make entry decisions at the county level but pay fixed regulatory costs at the state level, meaning that insurers who decide to enter a state due to high expected profits in other counties are more likely to enter a marginal county.  I thus instrument for insurer participation in a county with the average and total market size for counties in the rest of the state.  Using cross-sectional variation I estimate that additional insurers in the first year of the marketplaces lowered premiums.  Under various assumptions about consumer plan choice, they also lowered potential out-of-pocket payments uniformly for consumers with a broad range of hypothetical medical expenditures.  However, using time-series variation I find that additional insurers in the second year of the marketplaces had asymmetric effects.  A new insurer had no average effect on premiums and affected out-of-pocket payments heterogeneously for consumers with different types of medical expenses.