Provider Market Power and Adverse Selection in Health Insurance Markets: Evidence from the California Health Benefits Exchange

While the impact of market concentration on health care prices and quality has long been a subject of research, few studies have examined how provider market power influences the functioning of insurance markets. High provider mark-ups can raise premiums, with resulting effects on enrollment, adverse selection and market stability. These issue are particularly important in the individual marketplaces, which are susceptible to adverse selection, and where stabilizing measures are subject to political change. We examine the impact of provider market power in California, where there is large variation in provider market power and pricing. We use administrative data on enrollment, plan choice, plan premiums and costs to model consumer demand and equilibrium premium setting. We find that provider market power can exacerbate adverse selection, which federal subsidies and risk adjustments counter. However, subsidies in dominant provider markets are larger, leading to higher enrollment, but underinsurance conditional on enrollment. Given the incidence of the subsidy stemming from provider market power, counterfactual simulations show that policies that directly regulate provider prices may be a cost effective way to improve market functioning.