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Partial Rating Area Offering in the ACA Marketplaces: Facts, Theory and Evidence

Author

Listed:
  • Hanming Fang

    (Department of Economics, University of Pennsylvania)

  • Ami Ko

    (Department of Economics, Stanford University)

Abstract
In the health insurance marketplaces established by the Affordable Care Act (ACA), each state is divided into a set number of geographic “rating areas.†The ACA mandates that an insurer price its health insurance plan uniformly in all counties within the same rating area, conditional on insurees’ age and smoking status. However, the ACA does not require that an insurer sell its plan in all counties in a rating area. Using the federal marketplace data, we quantify the prevalence of a phenomenon, which we refer to as partial rating area offering, where insurers enter some but not all of the counties in a rating area. To understand why insurers selectively enter a subset of the counties in a rating area, we develop a simple model of insurer competition. The model implies that if common county characteristics, such as the county’s risk distribution, market size and provider availability, are the primary drivers for the partial rating area offering phenomenon, then there would be a positive correlation among insurers’ entry decisions. In contrast, if the partial rating area offering phenomenon is driven by market segmentation, then there would be a negative correlation. We develop a novel nonparametric correlation test and apply it to the federal marketplace data. We find strong evidence for a positive correlation of insurers’ entry decisions, suggesting that common cost factors are the main driver for the partial rating area offering phenomenon. To the extent that it is a concern that many counties now have few insurers, our result suggests that it is important to offer insurers subsidies that are tied to county characteristics.

Suggested Citation

  • Hanming Fang & Ami Ko, 2018. "Partial Rating Area Offering in the ACA Marketplaces: Facts, Theory and Evidence," PIER Working Paper Archive 18-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Oct 2018.
    • Handle: RePEc:pen:papers:18-025
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    References listed on IDEAS

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    Cited by:

    1. Maria Polyakova & Stephen P. Ryan, 2019. "Subsidy Targeting with Market Power," NBER Working Papers 26367, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Affordable Care Act; Health Insurance Marketplace; Rating Area; Service Area;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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