annual report 2011 - Office for Research - Northwestern University

Leemore Dafny
Kellogg School of Management
Competition in the Private Health
Insurance Market
When Leemore Dafny, management and strategy, began
studying the private health insurance industry in 2003, it
barely registered on the policy radar screen. It was widely
acknowledged that insurance was too expensive, but few
considered the possibility that the competitiveness of the
insurance market had anything to do with it, and precious
little data were available to researchers.
Dafny built a relationship with a large benefits consultancy
and soon had in hand a dataset on the insurance plans
for more than 10 million Americans obtaining coverage
through nearly 800 large multisite employers. She set about
documenting local market structures and identifying the
relationship between these structures and premium levels,
using a series of “natural experiments” as the basis for her
analyses. As the name suggests, a “natural experiment”
is a phenomenon that generates random variation in a
treatment of interest, enabling the social scientist to study
outcomes as the physical scientist would.
Dafny started by studying what happened to employers’
health insurance premiums when their profit margins
changed. Employers with deeper pockets should be willing
to pay more for health insurance, she reasoned, but they
would only have to do so if the insurance industry wasn’t
perfectly competitive and insurers could discriminate by
price. She found that they did price discriminate, and she
recruited coauthors to expand on that work by studying the
aftermath of another natural experiment: a single national
insurance merger, but with very different effects on market
structure across different geographies. The estimates from
that study suggested that the increase in consolidation
between 1998 and 2006 has raised insurance premiums by 7
percent—or $34 billion in 2007 alone. Research like this has
landed Dafny on the Congressional Budget Office’s Panel of
Health Advisers, where such numbers get a lot of attention.
Excellence in Research | Annual Report 2011 35
Andrew Campbell