The Effects of Price Regulation in Markets with Strategic Entry: Evidence from Health Insurance Markets

Abstract

Regulators often enact price restrictions with the goal of improving access to affordable products. However, the design of these regulations may interact with firm strategic entry and exit decisions in ways that mitigate the effects of pricing regulation or eliminate access to certain products entirely. In the US individual health insurance market, the Affordable Care Act established community rating areas made up of groups of counties in which insurers must offer plans at uniform prices, but insurers do not have to enter all counties in a rating area. The exact design of each market has been left to individual states. Allowing partial entry creates trade-offs in rating area design. Larger areas may support more competition, but heterogeneous areas may promote partial entry as firms choose to not enter high cost areas. To evaluate these trade-offs, I develop a model of insurer entry and pricing decisions and investigate how insurers respond to rating area design. I find that banning partial entry increases overall entry, average prices, and consumer welfare. I quantify the trade-offs of increasing rating area size and find returns to size concentrated when marginal costs are similar across counties in a rating area. Regulators must balance promoting competition with pooling high and low cost consumers in rating area design.