Inertia, Market Power, and Adverse Selection in Health Insurance: Evidence from the ACA Exchanges

We study how inertia interacts with market power and adverse selection in managed competition health insurance markets. We use consumer-level data to estimate a model of the California ACA exchange, in which four firms dominate the market and risk adjustment is in place to manage selection. We estimate high inertia costs, equal to 44% of average premiums. Although eliminating inertia exacerbates adverse selection, it significantly reduces market power such that average premiums decrease 13.2% and annual per-capita welfare increases $902. These effects are substantially smaller in settings without market power and/or risk adjustment. Moreover, converting the ACA's premium-linked subsidies to vouchers mitigates the impact of inertia by reducing market power, whereas reducing high consumer churn in the ACA exchanges increases the impact of inertia by enhancing market power. The impact of inertia is not sensitive to provider network generosity, despite greater consumer attachment to plans with more differentiated provider networks.

We study how inertia interacts with market power and adverse selection in managed competition health insurance markets. We use consumer-level data to estimate a model of the California ACA exchange, in which four firms dominate the market and risk adjustment is in place to manage selection. We estimate high inertia costs, equal to 44% of average premiums. Although eliminating inertia exacerbates adverse selection, it significantly reduces market power such that average premiums decrease 13.2% and annual per-capita welfare increases $902. These effects are substantially smaller in settings without market power and/or risk adjustment. Moreover, converting the ACA's premium-linked subsidies to vouchers mitigates the impact of inertia by reducing market power, whereas reducing high consumer churn in the ACA exchanges increases the impact of inertia by enhancing market power. The impact of inertia is not sensitive to provider network generosity, despite greater consumer attachment to plans with more differentiated provider networks.

We study how inertia interacts with market power and adverse selection in managed competition health insurance markets. We use consumer-level data to estimate a model of the California ACA exchange, in which four firms dominate the market and risk adjustment is in place to manage selection. We estimate high inertia costs, equal to 44% of average premiums. Although eliminating inertia exacerbates adverse selection, it significantly reduces market power such that average premiums decrease 13.2% and annual per-capita welfare increases $902. These effects are substantially smaller in settings without market power and/or risk adjustment. Moreover, converting the ACA's premium-linked subsidies to vouchers mitigates the impact of inertia by reducing market power, whereas reducing high consumer churn in the ACA exchanges increases the impact of inertia by enhancing market power. The impact of inertia is not sensitive to provider network generosity, despite greater consumer attachment to plans with more differentiated provider networks.

Firms have various strategic options at their disposal. In the most basic models of strategic interaction, firms choose a single strategic variable, quantity or price, once. In many markets, firms are seen as price setters. It thus appears natural to start with the analysis of price-setting firms in an environment with a few firms; we do so in Section 3.1. In other markets, however, it seems more reasonable to assume that firms choose quantities rather than prices; we analyse quantity competition in Section 3.2. We then proceed to compare price and quantity competition. First, in Section 3.3, we show that quantity competition can sometimes be mimicked by a two-stage model in which firms choose their capacity of production and next, set their price; we also directly compare price and quantity competition in a unified model of product differentiation. Second, in Section 3.4, we bring the comparison of price and quantity competition to a more general level by introducing the concepts of ‘strategic complements’ and ‘strategic substitutes’. Finally, in Section 3.5, we discuss the empirical investigation of industries with market power. Price competition We analyse here several models of price competition. We start with the standard Bertrand (1883) model where products are homogeneous. Then, we extend the model in two directions: first, we assume that firms have private information about their marginal costs of production; second, we consider differentiated products.

We develop a test for adverse selection and use it to examine privatehealth insurance markets. In contrast to earlier papers that consider apurely private system or a system in which private insurance supplementsa public system, we focus our attention on a system where privately fundedhealth care is substitutive of the publicly funded one. Using a model ofcompetition among insurers, we generate predictions about the correlationbetween risk and the probability of taking private insurance under bothsymmetric information and adverse selection. These predictions constitutethe basis for our adverse selection test. The theoretical model is also usefulto conclude that the setting that we focus on is especially attractive to testfor adverse selection. Using the British Household Panel Survey, we findevidence that adverse selection is present in this market. We develop a test for adverse selection and use it to examine privatehealth insurance markets. In contrast to earlier papers that consider apurely private system or a system in which private insurance supplementsa public system, we focus our attention on a system where privately fundedhealth care is substitutive of the publicly funded one. Using a model ofcompetition among insurers, we generate predictions about the correlationbetween risk and the probability of taking private insurance under bothsymmetric information and adverse selection. These predictions constitutethe basis for our adverse selection test. The theoretical model is also usefulto conclude that the setting that we focus on is especially attractive to testfor adverse selection. Using the British Household Panel Survey, we find evidence that adverse selection is present in this market.

Why we need more data on the dental insurance market

We are pleased to publish this special issue on health insurance, which coincides with a wave of health care reform in the United States. The debate over health care reform is much broader than the insurance coverage of health services, although health insurance is an important financing tool that affects many market participants. In fact, health insurance introduces, among other things, distortions in resource allocation by increasing access to health, by modifying the demand for and the supply of health care services, by changing individuals' incentives for health prevention, by affecting worker absenteeism and productivity, by increasing the financial obligations of firms, and by smoothing consumption over time. Scott Harrington proposes a comprehensive overview of the U.S. health care reform (as of early December 2009) with a focus on health insurance. His article presents the three main motivations for the reform: (1) high and rising annual growth of per capita expenditures in health expenditures not necessarily leading to a higher average quality of health for the population, (2) lack of access to insurance coverage of about 48 million residents, and (3) Medicare deficit and Medicaid cost growth. The author outlines the health care reform bills in the U.S. House and Senate, including the key provisions for expanding and regulating health insurance, and projections of the proposals' costs, funding, and impact on the number of people with insurance. The article also discusses other issues related to the reform: (1) the potential effects of mandated health insurance in conjunction with proposed premium subsidies and health insurance underwriting and rating restrictions, (2) the proposed creation of a public health insurance plan, and (3) provisions that would modify permissible grounds for health policy rescission and that would repeal the limited antitrust exemption for health and medical liability insurance. It concludes by contrasting the reform bills with market-oriented proposals and an outlook on future developments. The remainder of the special issue comprises analyses of health insurance issues that will continue to hold whatever the chosen reform. One important research question is the effect of asymmetric information on the functioning of insurance markets and particularly on health insurance. Alma Cohen and Peter Siegelman review the empirical literature on adverse selection in insurance markets. They focus on empirical tests of the basic prediction of adverse selection, namely, that policyholders that purchase more insurance coverage tend to be riskier. They observe that when such a correlation exists, it varies across insurance markets and pools of insurance policies. They discuss various reasons why a coverage--risk correlation may not be found in some markets. The presence of a positive coverage-risk correlation can also be explained by moral hazard, and the authors discuss methods for distinguishing moral hazard from adverse selection. Finally, they analyze how learning by policyholders and insurers can affect conclusions about the presence of asymmetric information in insurance markets. The next three articles deal with health care spending but do not analyze asymmetric information in detail, although this problem may be present in their data. Anthony T. Lo Sasso, Lorens A. Helmchen, and Robert Kaestner use a unique data set from an insurer to analyze the effects of consumer-directed health plans on health care spending. They conclude that the marginal dollar contributed by the employer to the spending account is entirely spent on outpatient and pharmacy services. In contrast, out-of-pocket spending is not responsive to the amount the employer contributes to the spending account. The magnitudes of the effects suggest important health care spending consequences of higher employer contributions to spending accounts. Their findings could be explained in part by moral hazard. Employers may offer employees a choice of health plans either to promote competition among plans or to better cater to employees' preferences for different types of products. …

The aim of this article is to estimate the type of selection that exists in the voluntary health insurance market in Colombia where the compulsory coverage is implemented through a managed care competition. We build a panel database that combines individuals’ information from the Ministry of Health and a database provided by two private health insurers. We perform the correlation test for health expenditure and coverage. Following Fang et al. (2008), we condition the estimation on health controls that are available to the econometrician but not to insurers. In both cases we obtain a positive correlation, suggesting that adverse selection predominates. In order to rule out some moral hazard effects, we estimate the correlation between previous health service consumption and insurance purchase. The positive correlation obtained is robust to the inclusion of controls for diagnosis, suggesting that despite some risk selection strategies, health insurers are not protected from adverse selection.

This study sought to examine the economic structure of the Philippine health care system, in the light of recent legislative initiatives in the country and global managed market reforms. In the context of a market-orientated system in the Philippines, the study modelled the interaction of health care agents in three markets: regulations, financing or insurance and health services. The bulk of the research examined the nature of exchange in the health services market, using neo-classical economics. Theories in industrial organization and public choice served as organizing frameworks for explaining other market elements. The study' s methodology used primary and secondary data analysis, as well as findings of other research, to bring together a coherent picture of the market structure of health care in the Philippines. The analysis of the regulatory market showed that the rent-seeking nature of Philippine social, political and medical institutions has weakened regulatory structures in health care. Compared to its Asian neighbours, the relative position of the country in the 60s in terms of major health indicators, has been eroded. Limited resources and allocative inefficiencies have affected the government's ability to fulfil its constitutional mandate to ensure minimum levels of care, especially for the poor. The performance of the market was examined in terms of health policy objectives of efficiency and equity in the financing of health care. Private sources, with households forming the bulk, comprised 64 percent of health care expenditures. The position of concentration curves drawn to illustrate the equity of household financing, showed inequities in health and health expenditures. The largely fee-for-service system operating in the health insurance market had caused risks to be borne largely by consumers and funders. Low coverage of the population and weak utilization rates, may have encouraged some providers to behave opportunistically. An examination of the prospects for an alternative system of compulsory health insurance, illustrated through a project with health maintenance organizations indicated the problems of contracting. Estimates of health service market conditions on the demand-side, from an outpatient provider choice model, showed low price and time cost elasticities, with the poor being more responsive than the rich. Simulations showed that the introduction of user fees in public services were likely to drive demand towards private care in urban areas, and out of the market in rural areas. The welfare effect estimates showed that if public hospitals were to charge one-half the price of private doctors, the welfare loss would be about 10 percent of household budget of the lowest income group. The amounts needed to compensate losers from the policy change can be transformed into contributions for risk -sharing schemes. From the supply-side, the distribution of facilities, productive resources and technology were shown to have wide variations across regions and types of facilities. The study cited research that showed that total cost structures in hospital firms were largely determined by the volume of services rendered. Moreover, variable costs were shown, by other research, to be neither influenced by scale nor by the scope of operations. The analysis of the market structure, based on a modified Hirschman-Herfindahl measure, showed that no hospital-firms had a dominant share of the market. Regression results, from the same research on total cost functions, showed that hospital outputs were unresponsive to actual competition. Price competition appeared to be swamped by nonprice competition. An examination of pricing behaviour showed widespread cost-price mark-ups, reflecting the 'market power' of providers. The co-existence of competitive and monopolistic tendencies in the health care market, combined with weak and/or distortive incentive structures, suggests that the tenets of contestability analysis were not fulfilled. The last chapter showed the limitations of the analysis in providing conclusive evidence on the behavioural underpinnings of the health care market in the Philippines. Conceptual and methodological difficulties, arising from data and measurement problems, imply that the results are at best exploratory; and that further work can use the issues raised as starting points. For health policy reforms in the Philippines, recent legislative initiatives could improve health sector performance from a three-pronged approach: enhancing access, agency and co-ordination.

Introduction Both theoretical and empirical studies have found that adverse selection in an insurance market reduces consumption of insurance by low risk insureds. The theoretical works of Akerlof (1970), Rothschild and Stiglitz (1976), Miyazaki (1977), and Wilson (1977) describe separating equilibria, where high risks purchase a policy with higher coverage than the policy that is purchased by low risks. Miyazaki extends the separating model to allow cross-policy subsidization, resulting in a wealth transfer from low risks to high risks. In addition to a separating equilibrium, Wilson describes a pooling model where high and low risks purchase the same policy so that low risks actually subsidize the insurance purchases of high risks. The empirical evidence generally supports the predictions of these theoretical models. Beliveau (1981) found that adverse selection leads to reduced insurance consumption by low risks in the life insurance market, and Dahlby (1983) and Puelz (1990) found similar results in the automobile insurance market. Browne and Doerpinghaus (1993) found evidence of adverse selection in the market for private supplemental medical insurance for the elderly. In another study, Browne (1992a) found that low risk individuals had less complete coverage in the individual medical insurance market than in the group market, where adverse selection is believed to be less problematic. Additionally, Browne found evidence that low risks subsidize the insurance consumption of high risks in the individual medical insurance market. His results could be explained by the presence of adverse selection or by low risks receiving more coverage in the group market than they would choose if they were purchasing insurance on their own in the individual market. His study does not address whether Miyazaki's separating model or Wilson's pooling model better characterizes the individual medical insurance market. This study extends empirical investigation of the individual medical insurance market and directly tests whether there is reduced consumption of insurance by low risks, whether a separating or pooling model best characterizes the market, and whether cross-subsidization from low to high risks occurs. The Data, the Model and Hypotheses The Data and Potential Tests The data used in the study are from the National Medical Care Expenditure Survey (NMCES) conducted during 1977 and 1978.(1) Only families for which the primary insured had nongroup, individually purchased medical expense insurance and for which complete insurance policy data are available are included for analysis. The data contain extensive demographic information on those insured, including age, sex, marital status, income, and geographic location. In addition, the data contain information on any activity limitations that the insured may have as well as a measure of self-reported health status.(2) In the study, insureds are classified as being low risk if the self-reported health status of family members is excellent, good, or fair, and they are classified as high risk if the self-reported health status of any family member is poor.(3) The health status data were collected ex ante in the first of the five rounds of interviews conducted during the two-year period covered by the study so that health status information does not reflect the insured's revised expectations based on actual claims history during the covered period.(4) Using the demographic data, the activity limitation variable, and the self-reported health status variable allows for not only a test of risk-induced insurance purchase but isolation of the component of risk (self-reported health status) about which insurers are by definition asymmetrically informed.(5) Demographic and health status information from the sample are summarized in Table 1. TABULAR DATA OMITTED Detailed data on the policies purchased by individuals (such as policy premiums, deductible amounts, out-of-pocket maximum limits, and policy coverage limits) allow for measurement of the completeness of coverage provided by each insurance policy. …

Due to special properties of moral hazard and adverse selection in health insurance contract, governments’ effort to efficiently provide health care services to their citizens tends to encounter many problems, especially in low income countries. The National Health Insurance of Ghana has not been immune to this problem. This paper, explores empirical research to test for the asymmetric information problem of moral hazard and adverse selection in health insurance contracts. It uses both quantitative and qualitative to analyze data gathered through a meaningfully administered questionnaire in the Sekyere West District of Ghana to make its conclusion on the subject matter. Keywords: National Health Insurance; Moral Hazard; Healthcare; Adverse Selection; Asymmetry Information

We measure the consequences of asymmetric information and imperfect competition in the Italian market for small business lines of credit. We provide evidence that a bank’s optimal price response to an increase in adverse selection varies depending on the degree of competition in its local market. More adverse selection causes prices to increase in competitive markets, but can have the opposite effect in more concentrated ones, where banks trade off higher markups and the desire to attract safer borrowers. This implies both that imperfect competition can moderate the welfare losses from an increase in adverse selection, and that an increase in adverse selection can moderate the welfare losses from market power. Exploiting detailed data on a representative sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. We find evidence of adverse selection in the data, and increase it with a policy experiment to evaluate its importance. As predicted, in the counterfactual equilibrium prices rise in more competitive markets and decline in more concentrated ones, where we also observe an increase in access to credit and a reduction in default rates. Thus market power may serve as a shield against the negative effects of an increase in adverse selection.

Network structures play a fundamental role in the modern economy. Examples vary from communication and transportation networks to supply chains and intermediation activities. Despite the economic relevance of these markets, the theoretical literature lacks an adequate framework to study price competition in these complex environments. In this paper we develop a model of imperfect price competition in networks. Our approach maps traditional concepts of market demand, market power and double marginalization into networks. We make three main contributions. First, we show the existence and uniqueness of an equilibrium price for a general class of networks. Second, we develop several comparative statics results which highlight the role of the network topology. Finally, we show that, contrary to traditional wisdom, vertical integration in networked markets may lead to a reduction in social welfare and outcomes that are not Pareto superior.

This paper studies risk selection between public and private health insurance when some, but not all, individuals can opt out of otherwise mandatory public insurance. Using a theoretical model, I show that public insurance is adversely selected when insurers and insureds are symmetrically informed about health-related risks, and that there can be adverse or advantageous selection when insureds are privately informed. Using data from the German Socio-Economic Panel, I find that (i) public insurance is, on balance, adversely selected under the German public health insurance with opt out scheme, (ii) individuals advantageously select public insurance based on risk aversion and residential location, and (iii) there is suggestive evidence of asymmetric information in the market for private health insurance. Copyright © 2016 John Wiley & Sons, Ltd.

We develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. We identify a set of key parameters for welfare analysis, allowing us to model the welfare impact of the actual policy as well as to estimate the socially optimal penalty level. Using data from Massachusetts, we estimate the key parameters of the model. We compare health insurance coverage, premiums, and insurer average health claim expenditures between Massachusetts and other states in the periods before and after the passage of Massachusetts health reform. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate; consistent with an initially adversely selected insurance market. We are also able to recover an estimated willingness-to-pay for health insurance. Combining demand and cost estimates as sufficient statistics for welfare analysis, we find an annual welfare gain of $335 dollars per person or $71 million annually in Massachusetts as a result of the reduction in adverse selection. We also find evidence for smaller post-reform markups in the individual market, which increased welfare by another $107 dollars per person per year and about $23 million per year overall. To put this in perspective, the total welfare gains were 8.4% of medical expenditures paid by insurers. Our model and empirical estimates suggest an optimal mandate penalty of $2,190. A penalty of this magnitude would increase health insurance to near universal levels. Our estimated optimal penalty is higher than the individual mandate penalty adopted in Massachusetts but close to the penalty implemented under the ACA.