Tax filing status of your insurer matters…

Leemore Dafney of Harvard is making me change my mind with some new research.  She asks if the behavior of large Blue Cross and Blue Shield organizations that convert from non-profit to for-profit status matters in terms of premiums and medical loss ratios.  I had always thought that there would be little difference in premiums before and after and merely a difference in how surplus was distributed.  I was wrong.

I study the effects of conversions to for-profit status by Blue Cross and Blue Shield (BCBS) affiliates in 11 states, spanning 28 geographic markets. I find both the BCBS affiliate and its rivals increased premiums following conversions in markets where the converting affiliate had substantial market share. Medicaid enrollment rates also increased in these markets, a pattern consistent with “crowd in” of families who were formerly privately-insured. The results suggest for-profit  insurers are likelier than not-for-profit insurers to exercise market power when they possess it.

I’m updating my assumptions.  The mechanism of the lower premiums in markets is that if a non-profit Blue is constrained to optimize on something other than profit maximization, its pricing decisions will be different than profit optimizing pricing decisions.  Assuming there are other insurers in the market of which some are attempting to profit maximize, the lower Blue non profit premiums act as a hard constraint on higher premiums.  Once the non-profit Blue converts to a for-profit entity, some if not all of the constraints that had previously governed pricing and coverage offering decisions weaken or disappear.  The Blue premiums go up and the other, profit seeking, firms can also raise prices as the soft price ceiling disappears too.

 

We find heterogeneous effects that depend on the magnitude of the converting BCBS affiliate’s market share. Specifically, fully-insured premiums increased roughly 13 percent when converting BCBS plans had shares in excess of the mean pre-conversion BCBS share (20% in our sample), and roughly zero when pre-conversion share fell below the mean. Importantly, we do not observe different pre-conversion price trends in markets ultimately experiencing conversions relative to control markets whose BCBS affiliates attempted but failed to convert, nor in markets experiencing relatively sizeable conversions (relative to markets without conversions or with smaller conversions). Assuming no disproportionate quality changes by large BCBS affiliates (a possibility we discuss and discount below), these results suggest a post-conversion exercise of market power. Significantly, rivals of these large converting insurers also raised their prices following the conversions.

She points out that this logic is what fueled the funding of co-ops in the ACA. Non-profit entities that have to at least break even while not profit optimizing can shift the economic incentives of for-profit firms if the non-profits are big enough.

This paper is critical research. It should make people move their priors towards the organizational structure of health insurers mattering more.