Regulations and Competition in Subsidized Insurance Markets


Richard Domurat

The U.S. government has been increasingly relying on markets to deliver public health insurance benefits. In this setting, policymakers not only need to consider the direct provisions to consumers (e.g. the level of the subsidy) but also how the subsidized markets function (e.g. the characteristics of the products offered). The exchanges established by the Affordable Care Act (ACA) are a recent example of this, where private insurers compete for subsidized consumers that don’t get coverage through an employer.

In his PhD dissertation, Richard Domurat studies what determines the outcomes we see in the ACA exchanges. In the ACA markets, there tends to be few insurers, many consumers with low levels of coverage (e.g. “Bronze” plans), and roughly half of the eligible population remaining uninsured instead of buying a plan. These patterns are generally contrary to the objectives of policymakers, which leads one to ask what is driving them. A common explanation that is consistent with these observations is that generous plans and the market as a whole are adversely selected—driven by enrollees with the highest risk. This explanation cites regulations in the law such as how premiums cannot vary by health or gender, which can increase premiums for low risk consumers. The study explores this explanation and explanations driven by other features in the market, namely characteristics of the consumers.

Domurat builds an empirical model of consumer choice (demand) and insurer profits (supply) to examine how regulations and market primitives drive market outcomes in equilibrium. To estimate the parameters of the model, he uses data on enrollment decisions and plan characteristics from California’s exchange. By combining these data with the economic model, he quantifies what plan characteristics are valuable to consumers, how profitable plans are, and simulates different regulatory environments.

The study indicates that consumer preferences, as opposed to the cited regulations, drive many of the aforementioned outcomes. Specifically, consumers are highly sensitive to premiums—for example, plan enrollment on average declines by about 4% for just a $1 increase in the premium. This high price elasticity has two implications. First, the common choice of low coverage plans is not driven by adverse selection but rather the preference for low premium plans. Second, it implies plan profitability is low, and prices become competitive after a small number of entrants. Therefore, it is unsurprising that so few plans compete in many ACA markets where fixed costs are high.

The broader implication of this work is that markets such as the ACA exchanges can deliver health care at premiums close to costs and provide low-price plans that people value.  This is especially true in California where regulators have taken additional steps to enhance competition.