Health Insurance Premia, Competition, and Endogeneity

An interesting article ran in our local paper today; the original was from Vermont Digger which provides news for Vermont.

The article looks at health insurance premia in Vermont versus the rest of the country; Vermont turns out to have the 5th highest rates out of 48 states.  These rates are for 2014 plans, offered on the exchanges, and are pre-subsidy.

The article mentions the lack of competition as one reason for high rates in Vermont, and it correctly notes that competition is relevant at two levels:  that at the supplier (hospital) level and that at the insurer level.

Vermont turns out to have little competition at both levels.  There are only two insurers offering policies on the Vermont exchange, and there is only one large hospital system in the state, Fletcher Allen.  Dartmouth Hitchcock, based in NH, would be the second largest supplier, with many Green Mountain folks driving across the Connecticut River for their care.

The only problem with the article's analysis is the problem of endogeneity.  Why does Vermont have only two insurers offering policies?  No doubt it is to a great extent because of Vermont's low population.  States with large populations tend to have more insurers, states with small populations tend to have fewer insurers.  Larger populations allow for economies of scale in insurance operations, and by itself will lead to lower rates.  So is it just the low population of Vermont that drives up rates, or is there an independent effect of little competition?  I suspect it is both.

The same is true on the health care supplier side. Why only one (relatively small) hospital system in Vermont?  There is just not enough market for more than one supplier of even close-to-efficient size. Again, economies of scale are limited by the extent of the market.  This alone will drive up health costs and hence insurance rates.  But it also limits competition, and that has an independent effect on rates.

Is small really so beautiful?  If nothing else, it comes at a price.