Market Structure and the Profitability of the U.S. Health Insurance Marketplace: A State-Level Analysis

Health insurance premiums have more than doubled over the past 10 years, which has been suggested to be the result of high market concentration in the health insurance industry. In this paper, we conduct a state-level analysis in which we examine the health insurance marketplace across the states and, more important, investigate the relation between market concentration and profitability. We find that there has been an increase in the number of insurers operating in most states over the sample period; accordingly, the extent of market concentration has declined in recent years. We also find evidence of a positive relation between market concentration and insurer profits but are unable to definitively determine if this result is due to anticompetitive behavior or greater efficiency of larger health insurers. To the extent that the provisions of the federal Patient Protection and Affordable Care Act (PPACA) will impact the number of insurers in the marketplace and/or the operational efficiency of health insurers, PPACA will likely affect the profitability of the health insurance industry.