The Effects of Market Structure and Payment Rate on the Entry of Private Health Plans into the Medicare Market

By Frakt, Austin B.; Pizer, Steven D. et al. | Inquiry, Spring 2012 | Go to article overview

The Effects of Market Structure and Payment Rate on the Entry of Private Health Plans into the Medicare Market


Frakt, Austin B., Pizer, Steven D., Feldman, Roger, Inquiry


Private insurance firms participating in Medicare can offer up to three principal plan types." coordinated care plans (CCPs), prescription drug plans (PDPs), and private fee-for-service (PFFS) plans. Firms can make entry and marketing decisions separately across plan types and geographic regions. In this study, we estimate firm-level models of Medicare private plan entry using data from the years 2007 to 2009. Our models" include a measure of market structure and separately identify CCP, PDP, and PFFS entry. We find evidence that entry barriers associated with CCP market concentration affect all three product types. We also find evidence of cross-product competition and common cost or demand factors that make entry with certain product combinations more likely. We predict that the market presence of CCPs and PFFS plans will decrease and that of PDPs will increase in response to payment reductions included in the new health reform law.

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Key questions in applied industrial organization pertain to the role of market structure in firms' entry decisions. A different set of inferences may be drawn about a market if concentration encourages entry rather than hinders it. On one hand, high market concentration suggests the existence of markups and a profit opportunity for potential entrants. On the other hand, incumbent firms may possess high market concentration due to barriers that preclude profitable entry of additional firms CAmel and Liang 1997). Thus, estimating the effect of market structure on entry provides a useful test of the presence of entry barriers. To our knowledge, no empirical analysis has been conducted that relates market structure to entry into the current, multiproduct Medicare private plan market.

In this study, we estimate reduced-form, firm-level entry models for the three main Medicare private plan types: coordinated care plans (CCPs) (largely health maintenance organizations [HMOs] and preferred provider organizations [PPOs]), private fee-for-service (PFFS) plans, and stand-alone prescription drug plans (PDPs). In doing so, we investigate the relation between market structure and entry for the multiproduct Medicare private plan market, controlling for the endogeneity of market structure with an instrumental variables (IV) approach. We focus on a select subset of plans that have exhibited the interest and ability to offer all three plan types. We find that higher CCP market concentration decreases the entry probability of that plan type, consistent with the presence of barriers to entry for the CCP submarket. We also find that CCP market concentration decreases the entry probability of the other two plan types, PFFS plans and PDPs, which is consistent with joint decision making across products within firms, possibly due to economies of scope.

We use our models to simulate changes in entry that would be induced by Medicare Advantage plan payment provisions in the new health reform law--the Patient Protection and Affordable Care Act (Pub. Law 111-148), as modified by the Health Care and Education Reconciliation Act of 2010 (Pub. Law 111-152) (hereafter jointly referred to as the ACA). Our simulations predict substantial market exit for the two main Medicare Advantage plan types that offer comprehensive benefits--CCPs and PFFS plans--and modest plan entry for PDPs.

These conclusions cannot be drawn from other Medicare plan entry models in the literature. To our knowledge, no recent paper has studied Medicare plan entry from the firm's perspective and none has estimated entry models across multiple product types. Our approach addresses these shortcomings. Because PDP entry decisions involve a different response to market characteristics in general and Medicare Advantage payment rates in particular, distinguishing PDPs from other plan types is a significant innovation in modeling entry of private plans into Medicare. (1) The same can be said for distinguishing PFFS plans and CCPs, although these plan types have more in common. …

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The Effects of Market Structure and Payment Rate on the Entry of Private Health Plans into the Medicare Market
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