A Survivor Analysis of Commercial Health Insurers

Abstract

In an earlier paper by Blair, Jackson, and Vogel 1975, multiple regression techniques were applied to several functional forms representing average administrative costs.1 In each instance, the regression results indicated the presence of scale economies in administering commercial health insurance. Some serious objections, however, can be raised with respect to this sort of econometric analysis. First, one must recognize that commercial health insurers are extremely complex multiproduct, multi-input firms. The econometric analysis in Blair et al. implicitly assumes the separability of the cost functions, which of course may not be the case. Second, the existence of group health insurance plans poses some difficulties. There are enormous economies of scale that accrue to the insurer as the size of the group increases. These economies were not Economies of scale in administering commercial health insurance have been found using multiple-regression techniques. This suggests that over time the large health insurers ought to increase in number and importance at the expense of the smaller firms. The survivor technique was applied to the commercial health insurance industry for the 1958-73 period. As we anticipated, the smallest size class shrank continuiously over the period in question. In contrast to a priori expectations, all the other size classes appeared to be viable. This result is analyzed in the context of some health insurance industry peculiarities.