Association for Public Policy Analysis & Management

Prior to the Affordable Care Act, most states’ individual and small group insurance markets were dominated by one or two insurers and health plans (collectively called insurers).  Insurers competed primarily by using mechanisms to screen and select people on the basis of their risks of incurring medical claims.  With high market concentration, insurers had little incentive to compete by providing efficient services; instead, their focus was on reducing their risk of covering people who might have very high medical costs.  As a result, many people were uninsured because insurers expected them to have high medical expenses and either rejected their applications for coverage or offered them policies at very high premiums. 

A principal goal of the Affordable Care Act (ACA) is to encourage greater numbers of insurers in the new insurance marketplaces and to shift insurers’ focus of competition from risk-selection to processes that increase consumer value, such as improving efficiency of services and quality of care.

To gain a perspective on how these reforms affected the nature of competition in the first year that the ACA marketplaces were enrolling people (2014), we visited six states – Arkansas, California, Connecticut, Maryland, Montana, and Texas – and conducted interviews with a variety of public and private sector policymakers, academic analysts, and consumer advocates.  We also analyzed data about the numbers and types of plans offered by insurers in the premium rating areas – which are the de facto marketplaces – of each of the six states.

Insurers are competing in terms of the prices (premiums) at which they are offering health plans.  But we also found that to offer plans at relatively low premiums, many insurers appear to be competing primarily in ways to control their costs as they relate to enrollees’ use of health care.  To control such costs, insurers are using two primary approaches:  patient cost-sharing (high deductibles, coinsurance and copayments) and narrower provider networks.  Although the health plans must meet the actuarial requirements of each of the metal levels (bronze, silver, gold, and platinum), insurers can meet the actuarial levels with different cost-sharing.  So insurers that want to attract people who expect to have very low health care spending might offer plans with high deductibles.  Similarly, narrow provider networks may be attractive to people who expect to have little need for health care.  In both cases, insurers can offer plans with lower premiums and simultaneously expect to control their costs.

We identified four characteristics of the states that are associated with insurers’ ability to use these approaches to control spending – and importantly, the different competitive strategies that emerged in the marketplaces.   As a result, the types of plan choices people have depend on where they live – and how insurers compete depends on which premium rating area and state they are in.  This finding raises a concern about carriers’ potential ability to avoid covering people who may have higher risks of costly medical conditions.