RESEARCH SPOTLIGHT: How does insurance competition affect medical consumption?

Intuitively, as health care consumers, we might assume that an increased copay or deductible leads individuals to postpone or forego medical procedures or follow-up care. Further, these decisions may affect an individual's long-term health. But how are these copays and deductibles affected by competition in the insurance market, and what does that mean for consumer health? These questions are the topic of a paper by sixth-year graduate student Conor Ryan.

Competition in insurance markets affects not only the monthly premium but also the cost-sharing terms (such as copays and coinsurance rates) of the offered products. These terms determine the out-of-pocket payment for medical care, which may affect a patient's medical decisions and health outcomes. However, there is relatively little research on how competition affects cost-sharing terms and the subsequent effects on medical consumption and health. In his paper, Ryan uses medical claims data to create a model that incorporates the consumer's insurance choice and health care use, as well as firm decisions on the premium and cost-sharing terms of their products.

Ryan's analysis reveals some compelling findings. "I find that medical consumption responds to cost-sharing terms. A $10 increase in the primary care copay leads to a 5.4 percent decrease in medical consumption. I also find that the cost-sharing terms of insurance have an effect on the health outcomes of patients. A $10 increase in the primary care copay leads to a 0.1 percentage point increase in inpatient mortality."

The model also examines the potential impact of a merger in the health insurance industry. Ryan summarizes, "I find that a reduction in competition not only leads to higher average insurance premiums, but also leads to higher levels of cost-sharing, which causes a reduction in medical spending and more deaths in an inpatient setting." Furthermore, "Using literature estimates on the value of a statistical life, I find that the reduction in the total spending on medical care is more than outweighed by the social costs of additional deaths."

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Future work could extend this framework to examine other areas of competition in health insurance, such as the design of hospital and physician networks, the design of drug formularies, or the use of non-financial tactics such as prior authorization requirements. "Each of these is also a mechanism through which insurance competition affects the amount and type of medical care received by insurance beneficiaries," comments Ryan.

During his time at Minnesota, Ryan has been recognized with numerous awards and fellowships, including first place in the third year paper competition, the Morton and Artice Silverman Fellowship, and the Kurt Winkelmann and Janine Gleason Fellowship. In fall 2021, he will join Penn State as an Assistant Professor.

When you look at Conor's CV, one thing that jumps out is his undergraduate major: Civil Engineering. Not exactly a common starting point for graduate students in economics. "I was interested in economics before I graduated [from Cornell, his undergraduate alma mater]. The national debate over health reform was going on, and I realized there were a lot of unanswered questions that were a lot more exciting to me to study than designing buildings," Conor explains. "I loved learning about civil engineering, but there isn't much that is unknown anymore." His curiosity and determination led him to knocking on doors in the Economics department asking for unpaid student research positions. After graduating, he was hired by the Department of Justice, working in the Antitrust Division. "And there is where I really began to seriously learn about and work on economic problems." A few years later, he was in Minnesota, pursuing his doctorate.