Kaiser Brief: How Competitive Are State Insurance Markets?

More open and transparent insurance markets is one goal of the Patient Protection and Affordable Care Act (ACA); by 2014, the act will require private insurers to provide coverage to individuals and small businesses by offering products with more comparable benefits and cost-sharing. The ACA also requires insurers to provide coverage regardless of preexisting health conditions. These and other changes included in the law will allow consumers to shop around for coverage. Purchasing health insurance will be facilitated by the establishment of health insurance exchanges; the exchanges are included in the reform law with the hope that enhanced competition among insurers will act to moderate premiums for individuals and small businesses. The government, which will subsidize the cost of coverage for low- and moderate-income individuals purchasing insurance through the exchanges, also hopes to benefit from lower costs. The Henry J. Kaiser Family Foundation’s Focus on Health Reform project recently released a brief titled How Competitive Are State Insurance Markets? to address the issue of the competitiveness of state health insurance markets for individuals and small groups to provide a context for policy decisions states will be making as they implement new insurance market rules and design insurance exchanges. According to the Kaiser brief, there are a variety of ways to measure insurance market competition, including percentage of the market (measured by number of people enrolled) represented by the largest insurer in the state. If one insurer controls a large proportion of the market, the state exchange’s ability to selectively contract may be limited, because the large insurer could not be excluded from the exchange without substantial disruption. Degree of competition can also be measured by determining the number of insurance carriers that each make up a threshold portion of the market, thereby quantifying the extent of choice available to consumers among plans with material enrollment. Plans with a market share of at least 5% control sufficient market share for future growth, the brief authors said. Another measure of competition is the Herfindahl-Hirschman Index (HHI), which measures how evenly market share is spread across a large number of insurers. HHI values range from 0 to 10,000; a value closer to 0 indicates a more competitive market. Individual Market The nongroup market will play an increasingly important role as provisions of the ACA are implemented, including insurance purchased inside and outside of exchanges, according to the brief. In 2010, 30 states plus the District of Columbia had individual insurance markets with at least half of the market dominated by a single insurance company. The median market share held by the largest carrier in each state was 54%. States in the West generally have more competitive markets, while more rural states in the upper Midwest and parts of the South and Mid-Atlantic are less competitive. States where the largest insurer is least dominant are Wisconsin, Colorado, Missouri, Pennsylvania, and New York. In those states, the largest insurers in the individual market accounted for 21% to 34% of total enrollment. In contrast, the largest insurers in Alabama and Indiana represented 86% and 84%, respectively, of each state’s individual market enrollment. The HHI produced similar results: only Wisconsin had an HHI <1500, indicating a competitive (unconcentrated) market. In 45 states, the HHI was >2500, indicating very little competition in those states. Overall, the median HHI in the individual market was 3761. Using the measurement of number of carriers with at least a 5% market share, the rankings were similar to the other measures. Three states—Colorado, Georgia, and Oregon—had 7 insurers with at least 5% market share, North Carolina had 1 insurer with a market share >5%, and 11 states had 2 insurers exceeding the 5% threshold. Small Group Market Results of analysis of the level of competition in the small group market were similar to those in the individual market. The median market share held by the largest insurer in each state was 51%; the market share ranged from 30% (Oregon, Pennsylvania, Arizona) to ≥80% (Mississippi, North Dakota, Louisiana, Alabama). In the small group market in 26 states and the District of Columbia, a single insurer accounted for >50% of the market. The median HHI was 3595 for the small group market; in 39 states, the HHI was >2500, an indicator of little competition. The median number of plans with a market share >5% was 4. Implications According to the brief’s authors, the analysis “suggests substantial variation in insurance market competition from state to state, in both individual and small group markets.… How markets change will ultimately depend on a confluence of factors, including decisions by state policymakers, local geography, and business decisions by insurers. And the effect on health insurance premiums will likely depend not only on the structure of insurance markets and decisions states make regarding exchanges and rate review, but also on the underlying cost of healthcare and the degree of competition among healthcare providers.”