One Reason Health Insurance Premiums Vary So Much

A 27-year-old in Jackson pays $336 a month for the second-cheapest silver health plan on Mississippi’s s federally run insurance marketplace. That is more than twice as much as the $154 a 27-year-old in Nashville would pay for the same type of policy, and the $138 for a similar person in Tucson.

Across all 34 insurance marketplaces run by the federal government, the average is $287, about 25 percent cheaper. The reason for the higher prices in some markets? Paltry competition, say Leemore Dafny and Christopher Ody from Northwestern University, and Jonathan Gruber of the Massachusetts Institute of Technology. Jackson has only two insurers on the marketplace: Humana and Centene. By contrast, four insurance companies slug it out on Nashville’s exchange. In Tucson, there are eight.

Jackson’s over-the-top premiums underscore one of the least-heralded shortcomings of the rollout of the Affordable Care Act: the scarcity of insurers on health plan exchanges, which is driving up the price of policies across the country.

The research by Ms. Dafny, Mr. Gruber and Mr. Ody, to be published by the National Bureau of Economic Research next week, concludes that premiums on the exchanges are 11 percent higher than they would be if all the health insurance companies that sell policies in each state had participated in the new markets for health plans.

More competition not only would lower premiums, but would also save the federal government money. It would spend $1.7 billion less in subsidies to low- and middle-income Americans buying policies on the health care insurance exchanges.

“Half of the population in the states with health exchanges facilitated by the federal government is served by three insurers or fewer,” Ms. Dafny said. “To have competition on the exchanges you need competitors.”

The findings are somewhat perplexing, though. By law, 80 to 85 percent of premiums must be devoted to medical spending. Insurers don’t have particularly large profit margins. They have no great incentive to charge customers through the nose.

Still, as Ms. Dafny explains, in markets where there are few insurers competing for business, premiums could rise simply because insurers wouldn’t drive as hard a bargain with hospitals to reduce costs. They could raise premiums to meet hospitals’ demands, without losing customers to the competition.

“A concentrated provider market may be a factor underlying the high premiums,” Ms. Dafny noted.

Of course, you also need competition among providers.

Consider Albany, Ga., which has the highest premiums of all the federally assisted markets, where the 27-year-old would pay $395. It has only one insurer, but also only one hospital. In 2011, the Federal Trade Commission failed to stop the merger of Phoebe-Putney Health System and Palmyra Park Hospital, creating a local monopoly. No matter how many insurers there were, the premiums would probably remain high.