It's an incorrect, but convenient, shorthand to say that the ACA establishes state-based health insurance markets. Actually, the markets are finer grained than that. Each state can decide the number and configuration of coverage regions that will exist within its borders, and insurers must elect whether to offer plans on a region-by-region basis.* Across a region, for a given plan, premiums and benefits are fixed.
These within-state regions are the real markets. Do their sizes and configurations matter?
According to work by Michael Dickstein and colleagues, released in an NBER working paper, they do. This is intuitive. If there is some fixed cost of entry that's largely independent of the number of potential consumers (market size), then an insurer should be more willing to enter a bigger market vs. a smaller one. (Such fixed costs could include those for marketing or for customer service centers, for instance.) Maybe bigger markets are better for competition and consumers.
But, what if a region's geographic extent includes areas with different types of consumers or different kinds of provider markets? What if there are some consumers in one part of the region that are harder to satisfy than in others with the kinds of products the insurer is good at offering, say? Or what if one part of the region has a dominant hospital system that demands higher prices than in other parts of the region with less provider concentration? Given the constraint that a plan's premiums and benefits are fixed over a region, some insurers might be less inclined to enter even a populous region that includes a subset of potential customers they cannot satisfy or areas where network establishment is too expensive. For them, the effective market is smaller than it appears.
Dickstein et al. examined insurers offering products in 33 of the 36 states that use healthcare.gov for their exchange. (The three states that use healthcare.gov they didn't include — Alaska, Nebraska, and Idaho — were dropped for technical reasons.) All told, their data encompass 2,388 counties from 398 coverage regions, representing about 66% of the approximately eight million people who enrolled in an exchange plan during the 2013-2014 open enrollment period. For analysis of premiums, the authors examined those for the second-cheapest silver rated plan for a 51-year-old.
There is considerable variation in coverage regions across states. Some states, like Florida, allow each county to be its own coverage region. That state has 67 coverage regions. Texas divides its 254 counties into only 26 coverage regions, however.
Further focusing on smaller, 1,157 rural counties, the authors divided them into groups based on the size of the population of counties with which these rural counties are grouped into coverage regions. They found that the greater the population of a coverage region, the greater number of insurers offer plans and with lower premiums. But, with another analysis at a regional level, they found that as a coverage region grows in geographic extent, the opposite holds: less entry and higher premiums. If the latter is an indicator of greater heterogeneity of customers or provider markets, both sets of results are consistent with the intuition offered above.
Being grouped in a region with a large urban county increases the expected number of entrants by between .6 and .8 insurers. The bundling also leads to an average decrease in annual premiums of between $200 and $300. [... However,] controlling for population, increasing land area from the 25th to 75th percentile leads to a decrease in the lognumber of entrants of between 6.5 and 15 percent. Premiums increase 7.0 to 8.3%.
These findings tell us that how states define regional markets matters, particularly how bundling rural counties with others affects market outcomes. In general, a bigger market promotes competition. But, the kind of bigness matters too: a market with a lot of consumers is good, but one very large in geographic extent is self defeating. That could be because of heterogeneous consumer preferences over wide areas and/or bundling more concentrated provider markets with ones less so.
These are interesting findings. Given our reliance on markets in the U.S. health system, and the benefits of competition, it's worth understanding how best to organize them to encourage better market outcomes.
* It is possible for insurers to offer products only within a subset of counties in coverage regions, but only in rare circumstances, like when establishing an adequate network is not feasible. By email, Dickstein told me that of the 186,566 plans region-plans on healthcare.gov, only 3% are not offered in all counties in a region. "These are mostly 'network plans,' as the number goes down to 1% for PPO/EPO and up to 5% for POS/HMO," he wrote.
Austin B. Frakt, PhD, is a health economist with the Department of Veterans Affairs and an associate professor at Boston University’s School of Medicine and School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs or Boston University.
From the editors: AcademyHealth’s 2015 Annual Research Meeting features several sessions on marketplaces. To view the sessions, access the online agenda and search ‘marketplace’ in the search box.