The Impact of Access Regulation on Health Insurance Market Structure. Executive Summary


Recent studies of health insurance regulation all have concluded that state regulation of insurance issue, renewal and rating in general either reduces health insurance coverage or, on net, has no impact on coverage. Some of these studies have found that regulation has no significant impact on overall coverage, but that regulation may change the risk distribution of the insured population – raising coverage among high-risk groups and individuals but lowering coverage among low-risk groups and individuals. This literature presumes that, by forcing insurers to accept and pool risk that they would otherwise deny or segment into high-risk rate classes, regulation raises insurer cost. In turn, it presumes that insurance prices rise, discouraging low-risk groups and individuals from buying coverage. As a result, the rate of private insurance coverage declines. Implicitly, all previous studies have assumed that insurance markets are competitive and, therefore, that higher price is an inevitable effect of regulation. Rarely are these studies able to observe price directly.

This paper considers the impact of insurance regulation on the structure of health insurance markets. We do not presume that health insurance markets are competitive. Indeed, both the group and individual health insurance markets in every state are highly concentrated among a few large insurers; most insurers hold very little market share. Thus, the largest insurers (and even some small insurers) probably enjoy a degree of monopoly power and therefore have some discretion about pricing. Moreover, smaller insurers (arguably operating with increasing returns to scale) may respond differently to regulation than larger insurers (with relatively constant returns to scale).

We test a number of regulatory variables against various measures of market structure, separately for the states’ group and the individual health insurance markets. Measures of market structure include the number of insurers selling coverage, the market share of different insurer types, and market concentration (measured as a Herfindahl index and large-firm market share).

We find that much or all of the changes that occurred in market structure were independent of state regulation, and that more “stringent” (i.e., unambiguous) regulation sometimes appeared to have positive market effects. Specifically, controlling for other factors that would influence the number of insurers in the group market, states with all-product guaranteed issue (as HIPAA later required) had more insurers selling coverage and less market concentration among the largest insurers than states that required guaranteed issue of some products or did not require guaranteed issue at all. In group markets with only guaranteed renewal (and no guaranteed issue or only guaranteed issue of some products), insurance markets were more concentrated. The combined effect of both all-product guaranteed issue and guaranteed renewal was a group market with both significantly more insurers and somewhat greater market concentration among the largest insurers. Shortened waiting periods for coverage of preexisting conditions appeared to cause some small insurers to abandon the group market (or to merge) and drove greater market concentration among the largest insurers. However, the magnitude of these latter effects was small.

We conclude that, if HIPAA’s small group provisions had any impact on the small group market, they were mixed: on net, HIPAA probably simplified the group market, encouraging more insurers to participate, despite the difficulty that some insurers may have encountered with shortened waiting periods for coverage of preexisting conditions. Ironically, markets with more modest reforms (only some-product guaranteed issue or only guaranteed renewal, such as many states had adopted prior to HIPAA) may have dampened competition by allowing markets to remain much more complex.

In the individual market, guaranteed issue of all products significantly increased market share among the largest insurers and may also have disfavored commercial insurers, reducing their market share. In contrast, guaranteed issue of only some products appeared to favor greater commercial insurer market share and drove less concentration of the market among the largest insurers. Notably, despite greater concern about adverse selection in the individual market, shortened waiting periods for coverage of preexisting conditions in the individual market had no measurable impact on any measure of market structure.

HIPAA did not address insurers’ rating practices in either the group or individual health insurance markets. States that limit insurer rating – typically prohibiting insurers from using health status or age as a rating factor, and sometimes establishing a composite rate band – have responded to their own policy priorities and political realities.

In the group market, the impacts of rate bands were complex. In states that more narrowly constrained overall (composite) rate variation, many more insurers participated in the group market. However, nearly all states with a composite rate band also limited health rating, and limits on health rating fully offset the impact of the composite band – producing no appreciable net difference in number of insurers in the group market. States that placed narrower limits on health rating in the group market (but no constraints on age rating or on composite rates) had many fewer insurers in the group market. Narrower constraints on age rating generally had no significant impact on any measure of market structure.

In the individual market, narrower limits on health rating appeared to reduce commercial market share (favoring BCBS plans). As in the group market, narrower constraints on age rating had no significant impact on any measure of market structure.

Reviewing the impacts of regulation in markets prior to implementation of HIPAA, it is unclear whether the effects of regulation are in themselves or on balance positive or negative. Whether some forms of regulation produce lower prices and greater coverage depends on the relative strength of their intermediate effects on the number of insurers and on market concentration. In a declining- cost industry such as health insurance, fewer insurers would (all else equal) result in lower-cost production. In a competitive market, lower prices would result. However, in a monopolistic market, the loss of insurers may further dampen price competition and foster higher prices. While available research is not directly helpful in comparing these effects, the emerging literature on insurance coverage suggests that the upward price effect of greater monopoly power – absent regulatory constraints on monopoly pricing – may have outweighed the downward price effect of more efficient levels of production in response to market regulation.