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Exchanges Face Concentrated Markets, Study Finds

By John Reichard, CQ HealthBeat Editor

October 14, 2011 -- The health care law aims to spur competition among insurers to lower premium costs for individuals and small employers by creating state health insurance exchanges, but in many instances, there aren't that many insurers around to compete, a new study suggests.

The study by the Kaiser Family Foundation finds that "while substantial variation exists...the current insurance markets in many states are highly concentrated with only modest competition."

States should consider how hotly contested markets are in deciding how to perform health care law (PL 111-148, PL 111-152) functions such as building exchanges and reviewing insurance rates, the study says.

States with few insurers can counteract the market power of the big players by employing an "active purchaser" model, for example. Under that structure, the state has the power to force down rates by threatening exclusion from the exchange. States with uncompetitive markets also can pass laws requiring insurers to obtain their approval for rate increases, it adds.

In the individual market, just a handful of states have markets rated either as "competitive" or as having only "moderate concentration," the study says. Those states include Colorado (seven insurers with market shares of 5 percent or more); Wisconsin (six); Missouri (five); and Pennsylvania (five). Alabama, with two insurers with more than five percent of the market—one of which has an 86 percent share—is the least competitive market.

In total, 30 states have individual insurance markets in which one insurer controls at least half the market.

The small-group market is similarly concentrated. Twenty-six states and the District of Columbia have small-group insurance markets with a single insurer accounting for more than half the market.

Researchers in the study also employed the technical tool known as the "Herfindahl-Hirschman Index" to rate the level of competition in a state. The index squares the market share of competing insurers. Thus if a market had 10 insurers each with 10 percent market shares, the index would total 1,000 (each of the 10 would have a value of 100, adding up to a total of 1,000).

A value below 1,000 indicates a highly competitive market. A value between 1,000 and 1,500 indicates an unconcentrated market. One between 1,500 and 2,500 suggests moderate concentration. Results above 2,500 generally indicate a highly concentrated market.

Using that scale only one state in the study—Wisconsin in the individual insurance market—had a rating below 1,500 (1,434) indicating an unconcentrated market. The median index rating in the individual market was 3,761. Alabama in the small-group market had a rating of 9,175 and the median rating was 3,595. The upshot: markets have a long way to go to be rated as truly competitive.

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