Leemore Dafny, PhD
Assistant Professor of Management & Strategy
Kellogg School of Management
Northwestern University

Are Health Insurance Markets Competitive?
A Test of Direct Price Discrimination

April 13, 2007
12:00-1:30 PM
Colonial Penn Center Auditorium (3641 Locust Walk)

Abstract Paper

Biosketch: Leemore Dafny is assistant professor of management and strategy at Northwestern's Kellogg School of Management. Trained as an economist, Dafny uses econometric methods to investigate the impact of public health insurance on healthcare costs and expenditures and to study competition in healthcare markets. Using nationwide data on Medicare beneficiaries, Dafny has examined the impact of Medicare pricing on the quantity and quality of inpatient admissions. She has also explored the strategic behavior of hospitals in surgical fields, finding evidence that hospitals may acquire additional experience in certain surgeries in order to deter entry by other providers. Currently, Dafny is investigating the effects of quality reporting on the Medicare HMO market, as well as exploring the impacts of hospital mergers on inpatient prices. Dafny is also a Faculty Research Fellow of the National Bureau of Economic Research in Cambridge, Mass.


Abstract:
Very little is known about the degree of competition in the private health insurance industry, despite its large and growing role in U.S. healthcare. Data is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study explores competitive behavior in local geographic markets by making use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers. I search for evidence of direct price discrimination by examining whether insurers successfully charge higher premiums to more profitable firms. I find they do, and the results are robust to specifications that rely only on shocks to the profits of given company over time and thus use no cross-firm variation. Moreover, the practice is strongest in markets with few insurers. Specifically, I find a multisite firm with a 10-percentage-point increase in profit margins will subsequently pay 1.5 percent more for health insurance, but only at sites served by 6 or fewer major carriers. This evidence of direct price discrimination suggests that, at least in some markets, imperfect competition among carriers is leading to higher health insurance premiums.
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