Rules of the Market Do Not Apply to Health Insurance Companies

Buried in a quick notice in Business Week was this paragraph:

Health insurance companies have plenty of critics. Now they have one more: Leemore Dafny, an assistant professor at Northwestern University's Kellogg School of Management. Insurers argue that because they compete against one another, they keep prices down, saving everyone money. Not necessarily, says Dafny in a March paper, "Are Health Insurance Markets Competitive?" Dafny looked at data from 1998 to 2005, provided to her by a benefits consulting firm, that tracked the behavior of 200 major companies to see whether they shopped around to find the cheapest insurers. Dafny found that when these big companies made more money, their insurance providers raised their premiums. But instead of dropping the carrier to get a better deal, Dafny writes, companies generally stuck with their health insurers and paid more. "Carriers can and do take advantage of a firm's increased profits and extract higher prices from them," she says.
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