Working Papers
How does Insurance Competition Affect Medical Consumption?, November 2021
Competition in insurance markets affects not only the monthly premium but also the cost-sharing terms---e.g. copays and coinsurance rates--- which may affect a patient's medical decisions and thus the patient's health outcomes. However, there is little evidence on how competition affects medical consumption through these cost-sharing terms. Using medical claims data linked to insurance products choices, I estimate a model in which consumers select an insurance plan and make medical consumption decisions given the cost-sharing terms of their insurance. Firms compete by setting both the premium and the cost-sharing terms of their products. I find that a $10 increase in the primary care copay leads to a 5.4% decrease in medical consumption and a 0.1 percentage point increase in inpatient mortality. Further, less competition leads to higher levels of cost-sharing on average. Through this channel, a reduction in competition via a merger leads to up to a 4% increase in the primary care copay, an average reduction in medical spending of $17 per person, and an additional six inpatient deaths per year. At estimates of the statistical value of a life, the reduction in spending is more than outweighed by the cost of additional deaths.
Mergers in the Presence of Adverse Selection, May 2022
In the presence of adverse selection, market power has a welfare benefit. Firms have an incentive to offer products that appeal to low-cost consumers and lead high-cost consumers to purchase insurance elsewhere. This inefficient sorting distortion is worst in highly competitive markets and absent in a monopoly. Market power also carries the welfare cost of higher markups. Due to these two opposing forces, the both the magnitude and the direction of the effect of a merger on total welfare is an empirical question. In this paper, I show how this trade-off can be captured in an empirically tractable discrete choice model and apply the model to a proposed merger in the individual insurance market regulated by the ACA. I find that, absent any taxes or transfers to address adverse selection, the merger leads to improvements in both consumer and producer surplus. When accounting for the taxes and transfers under the ACA that intend to address adverse selection, the inefficient sorting distortion is small in even the most competitive markets, and the merger reduces consumer and total welfare. This highlights that antitrust enforcement and other policies that encourage competition are complements to regulations targeting adverse selection.
A Tractable Income Process for Business Cycle Analysis (with Fatih Guvenen and Alisdair McKay), February 2022
We estimate a parsimonious income process that is consistent with several key features of how income risk varies over the business cycle. In particular, the estimated process generates year-to-year income changes that (i) have flat and acyclical variance, (ii) have volatile and procyclical skewness, (iii) have very high kurtosis, and (iv) imply a moderate rise in cross-sectional inequality over the life cycle consistent with the US data. Furthermore, the process also captures the predictable nature of business cycle income risk: income changes during a business cycle episode are partly predicted by income levels before that episode. The estimated process features a time-varying distribution of innovations as well as a factor structure for business cycle exposure.
Competition in insurance markets affects not only the monthly premium but also the cost-sharing terms---e.g. copays and coinsurance rates--- which may affect a patient's medical decisions and thus the patient's health outcomes. However, there is little evidence on how competition affects medical consumption through these cost-sharing terms. Using medical claims data linked to insurance products choices, I estimate a model in which consumers select an insurance plan and make medical consumption decisions given the cost-sharing terms of their insurance. Firms compete by setting both the premium and the cost-sharing terms of their products. I find that a $10 increase in the primary care copay leads to a 5.4% decrease in medical consumption and a 0.1 percentage point increase in inpatient mortality. Further, less competition leads to higher levels of cost-sharing on average. Through this channel, a reduction in competition via a merger leads to up to a 4% increase in the primary care copay, an average reduction in medical spending of $17 per person, and an additional six inpatient deaths per year. At estimates of the statistical value of a life, the reduction in spending is more than outweighed by the cost of additional deaths.
Mergers in the Presence of Adverse Selection, May 2022
In the presence of adverse selection, market power has a welfare benefit. Firms have an incentive to offer products that appeal to low-cost consumers and lead high-cost consumers to purchase insurance elsewhere. This inefficient sorting distortion is worst in highly competitive markets and absent in a monopoly. Market power also carries the welfare cost of higher markups. Due to these two opposing forces, the both the magnitude and the direction of the effect of a merger on total welfare is an empirical question. In this paper, I show how this trade-off can be captured in an empirically tractable discrete choice model and apply the model to a proposed merger in the individual insurance market regulated by the ACA. I find that, absent any taxes or transfers to address adverse selection, the merger leads to improvements in both consumer and producer surplus. When accounting for the taxes and transfers under the ACA that intend to address adverse selection, the inefficient sorting distortion is small in even the most competitive markets, and the merger reduces consumer and total welfare. This highlights that antitrust enforcement and other policies that encourage competition are complements to regulations targeting adverse selection.
A Tractable Income Process for Business Cycle Analysis (with Fatih Guvenen and Alisdair McKay), February 2022
We estimate a parsimonious income process that is consistent with several key features of how income risk varies over the business cycle. In particular, the estimated process generates year-to-year income changes that (i) have flat and acyclical variance, (ii) have volatile and procyclical skewness, (iii) have very high kurtosis, and (iv) imply a moderate rise in cross-sectional inequality over the life cycle consistent with the US data. Furthermore, the process also captures the predictable nature of business cycle income risk: income changes during a business cycle episode are partly predicted by income levels before that episode. The estimated process features a time-varying distribution of innovations as well as a factor structure for business cycle exposure.
Publications
Sources of Inertia in Health Plan Choice in the Individual Health Insurance Market (with Coleman Drake and Bryan Dowd),
November 2021 (forthcoming, Journal of Public Economics)
The Demand for Individual Insurance: Evidence from a Private Online Marketplace (with Roger Feldman and Stephen Parente),
August 2021 (forthcoming, American Journal of Health Economics)
Upward Pricing Pressure as a Predictor of Merger Price Effects (with Nathan Miller, Marc Remer, and Gloria Sheu), International Journal of Industrial Organization, 52, 2017: 216-247
Pass-Through and the Prediction of Merger Price Effects (with Nathan Miller, Marc Remer, and Gloria Sheu), Journal of Industrial Economics, 64(4) 201, 2016: 683-709.
November 2021 (forthcoming, Journal of Public Economics)
The Demand for Individual Insurance: Evidence from a Private Online Marketplace (with Roger Feldman and Stephen Parente),
August 2021 (forthcoming, American Journal of Health Economics)
Upward Pricing Pressure as a Predictor of Merger Price Effects (with Nathan Miller, Marc Remer, and Gloria Sheu), International Journal of Industrial Organization, 52, 2017: 216-247
Pass-Through and the Prediction of Merger Price Effects (with Nathan Miller, Marc Remer, and Gloria Sheu), Journal of Industrial Economics, 64(4) 201, 2016: 683-709.
