Working Papers
Market Power in the Presence of Adverse Selection, March 2020
Market power can reduce the symptoms of adverse selection. To see the relationship, consider the incentive for a firm to offer a product that appeals to low-risk consumers and leads high-risk consumers to purchase insurance elsewhere. This incentive problem can be addressed through regulation but is also absent in a monopoly. This paper develops a model of welfare to explicitly characterize the substitutability between adverse selection regulation and market power. Market concentration has welfare benefits by reducing inefficient sorting of consumers among available plan options, a symptom of adverse selection. However, since market concentration also carries the welfare cost of higher markups, the magnitude and net direction of the effects are an empirical question. The model is estimated for the non-group market using novel choice data from a private online broker and a risk prediction model to relate preferences to marginal cost. The analysis focuses on two policies that target different dimensions of adverse selection: risk adjustment and the individual mandate. A simulation of a proposed merger of two insurance firms shows that, in the absence of a risk adjustment policy, the merger improves consumer welfare in markets that are not already highly concentrated. While the risk adjustment policy does not optimally price the sorting externality, it is successful in reducing the welfare cost of inefficient sorting and also eliminating the potential benefit to consumers from additional market power. The individual mandate is successful in increasing the insurance rate and lowering prices in the least concentrated markets, but leads to higher prices in the most concentrated markets. These results suggest that selection regulation is advantageous in competitive insurance markets, and less necessary and potentially harmful in very concentrated markets.
Sources of Inertia in Health Plan Choice in the Individual Health Insurance Market (with Coleman Drake and Bryan Dowd), March 2020 (under review).
We decompose inertia in health plan choice in the individual health insurance market into three sources: inattention to alternatives, hassle costs related to switching, and tastes for provider continuity. Administrative 2014-2018 data from California’s Health Insurance Marketplace show that 83% of returning households select their default health plans. Using a default-consideration framework, we find that roughly three quarters of default plan selections are due to inertia, nearly 90% of which are due to inattention, hassle costs, and their interaction with one another. We validate our identification of inattention using information on whether households made active plan selections.
The Effect of an Insurance Mandate: Evidence from an Online Exchange (with Roger Feldman and Stephen Parente), October 2019 (under review).
We use a novel data set from a private online marketplace to estimate the demand for individual health insurance and the efficacy of the individual mandate across 126 geographic markets. We find that the own-price semi-elasticities for an insurance product range between -16 and -22, and the semi-elasticity of insurance coverage with respect to the mandate penalty is -1.5. Using a stylized model of supply, we find that the individual mandate modestly increased the share of insured individuals in 2015 by 2.9 percentage points – from 46.6 percent to 49.5 percent.
Market power can reduce the symptoms of adverse selection. To see the relationship, consider the incentive for a firm to offer a product that appeals to low-risk consumers and leads high-risk consumers to purchase insurance elsewhere. This incentive problem can be addressed through regulation but is also absent in a monopoly. This paper develops a model of welfare to explicitly characterize the substitutability between adverse selection regulation and market power. Market concentration has welfare benefits by reducing inefficient sorting of consumers among available plan options, a symptom of adverse selection. However, since market concentration also carries the welfare cost of higher markups, the magnitude and net direction of the effects are an empirical question. The model is estimated for the non-group market using novel choice data from a private online broker and a risk prediction model to relate preferences to marginal cost. The analysis focuses on two policies that target different dimensions of adverse selection: risk adjustment and the individual mandate. A simulation of a proposed merger of two insurance firms shows that, in the absence of a risk adjustment policy, the merger improves consumer welfare in markets that are not already highly concentrated. While the risk adjustment policy does not optimally price the sorting externality, it is successful in reducing the welfare cost of inefficient sorting and also eliminating the potential benefit to consumers from additional market power. The individual mandate is successful in increasing the insurance rate and lowering prices in the least concentrated markets, but leads to higher prices in the most concentrated markets. These results suggest that selection regulation is advantageous in competitive insurance markets, and less necessary and potentially harmful in very concentrated markets.
Sources of Inertia in Health Plan Choice in the Individual Health Insurance Market (with Coleman Drake and Bryan Dowd), March 2020 (under review).
We decompose inertia in health plan choice in the individual health insurance market into three sources: inattention to alternatives, hassle costs related to switching, and tastes for provider continuity. Administrative 2014-2018 data from California’s Health Insurance Marketplace show that 83% of returning households select their default health plans. Using a default-consideration framework, we find that roughly three quarters of default plan selections are due to inertia, nearly 90% of which are due to inattention, hassle costs, and their interaction with one another. We validate our identification of inattention using information on whether households made active plan selections.
The Effect of an Insurance Mandate: Evidence from an Online Exchange (with Roger Feldman and Stephen Parente), October 2019 (under review).
We use a novel data set from a private online marketplace to estimate the demand for individual health insurance and the efficacy of the individual mandate across 126 geographic markets. We find that the own-price semi-elasticities for an insurance product range between -16 and -22, and the semi-elasticity of insurance coverage with respect to the mandate penalty is -1.5. Using a stylized model of supply, we find that the individual mandate modestly increased the share of insured individuals in 2015 by 2.9 percentage points – from 46.6 percent to 49.5 percent.
Publications
Upward Pricing Pressure as a Predictor of Merger Price Effects (with Nathan Miller, Marc Remer, and Gloria Sheu), International Journal of Industrial Organization, May 2017.
Pass-Through and the Prediction of Merger Price Effects (with Nathan Miller, Marc Remer, and Gloria Sheu), Journal of Industrial Economics, February 2017.
Pass-Through and the Prediction of Merger Price Effects (with Nathan Miller, Marc Remer, and Gloria Sheu), Journal of Industrial Economics, February 2017.
