How Exchange Market Size Matters

It’s an incorrect, but convenient, shorthand to say that the Affordable Care Act establishes state-based health insurance markets. Actually, the markets are finer grained than that. Each state can decide the number and configuration of coverage regions that will exist within its borders, and insurers must elect whether to offer plans on a region-by-region basis. Across a region, for a given plan, premiums and benefits are fixed.

These within-state regions are the real markets. Do their sizes and configurations matter?

According to work by Michael Dickstein and colleagues, released in an NBER working paper, they do. This is intuitive. If there is some fixed cost of entry that’s largely independent of the number of potential consumers (market size), then an insurer should be more willing to enter a bigger market vs. a smaller one. (Such fixed costs could include those for marketing or for customer service centers, for instance.) Maybe bigger markets are better for competition and consumers.

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