UHERO 101.11: Hawaii Health Insurance Premiums, Oligopolies, and the Affordable Care Act
by Inna Cintina, UHERO, December 20, 2013
Earlier this year the Federal Department of Health and Human Services (FDHHS) issued a summary report on the health plan choices and premiums across the country that will be available in the Health Insurance Marketplace. This report focuses on assessment of the plans with the lowest premiums in each state, as those are expected to be popular among consumers. An interesting question is “Where do Hawaii plans/premiums stand relative to other states?” Unfortunately, there is not an easy answer to this question. The Hawaii Health Connector released its estimates too late to be included in the FDHHS report and the direct comparison of premiums across two reports is not straightforward. However, some useful observations can be drawn.
The FDHHS report notes that across 36 states included in the analysis, premiums tend to be lower in states where there is more competition and transparency. For years there have been talks about the level of competition in the Hawaii's health insurance market. According to the latest study done by the American Medical Association, Hawaii tops the list of states with the least competitive commercial health insurance market. This is a case where being at the top is not a good thing, at least not for prices.
“Oligopoly” is the way economists describe situations in which a particular market is characterized by a small number of firms that supply the entire market. A given industry with a large number of firms can be oligopoly as well, if a few of the firms are relatively large compared to the overall market (i.e. they produce most of the industry’s output)1. Two health insurance providers have dominated the Hawaii market for many years: the Hawaii Medical Service Association (HMSA) and the Kaiser Foundation Health Plan (Kaiser). Together, the plans claim nearly 90% of the insured, with HMSA representing more than 50%.
A small number of firms in Hawaii’s market does not necessarily mean relatively high premiums. The determination of premiums is an interesting and complex question. Premiums vary among states, reflecting variance in underwriting regulations, health care costs, demographic characteristics, and consumer preference. To illustrate, prior to the passage of the Affordable Care Act (ACA aka Obamacare), rules regulating the individual market for health coverage varied considerably across states. In some states (e.g., Maryland) companies can exclude individuals with pre-existing illness from coverage. This can help keep rates lower (but only for those who qualify). In other states (e.g., New York) the opposite rule applies: insurance companies were prohibited from excluding individuals with pre-existing illness. This prohibition has been associated with much higher rates in the market.
Based on a comparison of individual rates, the Hawaii Department of Commerce and Consumer Affairs concluded that the rates approved for the Hawaii Health Connector are among the lowest in costs in the nation. Without additional research, it's impossible to know why Hawaii's ACA plan costs appear to be lower than in some other states. It's worth noting that Hawaii’s market might, in some respects, be unique. The majority of the population here has health insurance. (The 2010-2012 estimates from the American Community Survey indicate that the proportion of people aged 18-64 without the health insurance coverage in Hawaii is 10%, whereas the corresponding nationwide statistics is twice as high at 21%. Among people 65 years and older it is 1.2%, about the same level as nationwide.) It's conceivable that lower overall premiums may be due to more effective risk pooling. Determining whether this is the case is perhaps the topic of future UHERO research.
1 In such markets, competition between firms does exist as firms try to attract more customers, but it is realized via incentives rather than changes (decreases) in prices. Instead, prices are kept relatively constant, but firms engage in fierce advertising highlighting the differences across products to attract customers.