Keith Ericson Authors NBER Study on Mandates in Health Insurance Exchanges
“Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange”
A new National Bureau of Economic Research (NBER) study, authored by Keith M. Marzilli Ericson and Amanda Starc and focused on pricing regulation in health insurance exchanges (HIE), shows that purchasing mandates can be essential to the functioning of this entire market.
Ericson is an assistant professor of markets, public policy, and law at Boston University School of Management. Starc is an assistant professor of health care management at the Wharton School at the University of Pennsylvania.
Their study, “Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange,” explores pricing regulation, consumer demand, and insurer profits in HIE, which are government-run marketplaces for private insurance. The authors use data from Massachusetts’s HIE, the first in the nation, and then apply these data to the broader functioning of health exchanges themselves. Their focus on the mandate, requiring citizens to purchase a minimum level of insurance, sheds light on one of the most controversial issues in Congress’ recent struggles over health care across America.
HIEs: An Ideal Context for Exploring Consumer Welfare, Regulation, and Profit
The authors point out that HIEs offer an ideal opportunity to study issues of consumer welfare, competition, government regulation, and firm profits, as they offer a wide range of choice to consumers in the context of a heavily regulated environment. Moreover, in the next few years, a projected 20 million Americans across the country will purchase health insurance through these exchanges, as the 2010 Affordable Care Act has mandated that states and the federal government develop HIEs.
But Ericson and Starc note a lack of previous research exploring how insurance pricing regulation actually functions in markets where firms have some market power to charge prices above their costs—a condition they refer to as “imperfect competition.”
Their new NBER study fills this gap.
“If the Mandate Is Removed, Markets Can Unravel”
Ericson and Starc first execute a series of simulations based on data from the Massachusetts HIE to show how changing regulations on insurers can vary prices between different types of consumers (such as older vs. younger consumers) and can impact other important and controversial insurance market regulations, such as minimum loss ratios (which attempt to limit insurer profits), risk adjustment (which attempts to equalize insurers’ costs derived from insuring different populations), and mandated insurance purchase (which attempts to ensure market participation).
Ultimately, the study’s simulations show that if the mandate is removed, markets can unravel, due to differences in preferences across a broad population where a significant segment of that population would be willing to withdraw from the market altogether if they can’t find a price they are willing to pay.
If consumers are allowed to opt out of coverage, the authors note, the most price-sensitive consumers—who tend to be both young and relatively healthy—will tend to opt out. As these consumers opt out, the less price-sensitive consumers—who tend to be both older and have higher health costs—are the ones remaining in the market, which in turn leads to higher markups. If enough people are willing to drop out of the market altogether, the authors note, “a death spiral” can occur. “As a result,” Ericson and Starc show, “a weak or absent mandate may negate the consumer surplus gains achieved” from the other regulations still in place.
Read more about the study “Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange.”
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