An Examination of Insurers’ Local Market Entry Decisions in the Federally Facilitated Marketplace

This study investigates insurer entry into the Federally Facilitated Marketplace (FFM) for individual health insurance during 2015, to shed light on the evolving dynamics of a newly created market. We examine this variation in the number of insurers in local markets as a function of factors affecting demand and cost.   Our primary data source is the Qualified Health Plan (QHP) Landscape File, augmented with demographic, provider, and insurer characteristics from the Area Health Resource File, the SK&A census of healthcare providers, and the National Association of Insurance Commissioners’ annual filings.  We estimate an ordered probit model where the number of participating insurers in a county is a function of population, demographics, and provider market attributes, reflecting insurer perceptions of profitability.  Our results suggest that population, median income, and greater specialty provider competition are positively related to the number of entrants in a local market.

To further understand local market entry patterns we examine insurers’ administrative cost heterogeneity, group affiliation and ownership status by the number of entrants in markets.  Analyses of administrative cost heterogeneity suggest that entrants have lower costs relative to other insurers, but the magnitudes of differences are modest.  Blue Cross Blue Shield is the dominant insurer in monopoly markets with the vast majority having mutual or other ownership versus for-profit stock ownership, whereas in markets with a larger numbers of insurers, the majority have stock ownership. The number of for-profit insurers in markets increases more rapidly than market size, growing from 1.24 in duopolies to 4.47 for markets with six entrants. Duopoly markets tend to have competition between a BCBS affiliate and a local or regional insurer, or competition between a BCBS affiliate and an insurer affiliated with UnitedHealth Group, Humana, Cigna, or Aetna (UHCA). Head-to-head competition between UHCA insurers in local markets only becomes more prevalent once the market has at least five firms.  Overall, the results suggest that insurer entry decisions are sensitive to factors that suggest favorable market conditions, and that understanding the composition of insurers in addition to the number operating in a local market will be important for understanding the nature of competition in the Exchange-based market.