Job Market Paper
How does Insurance Competition Affect Medical Consumption? (click for draft)
Competition in insurance markets affects not only the monthly premium but also the cost-sharing terms---e.g. copays and coinsurance rates--- of the offered products. These terms determine the out-of-pocket price of medical care, which may affect a patient's medical decisions and thus the patient's health outcomes. However, there is relatively little research on how competition affects cost-sharing terms and the subsequent effects on medical consumption and health. In this paper, I estimate a model of imperfect competition in Medicare Advantage that characterizes the consumer's insurance choice and medical consumption, and allows firms to set both the premium and cost-sharing terms of their products. Using rich medical claims data, the model incorporates adverse selection, moral hazard, and the effect of cost-sharing terms on consumer health. There are three main findings. First, I show that, on average, less competition leads to higher levels of cost-sharing, but a merger between multi-product firms may lead the cost-sharing levels of some products to increase and others to decrease. Second, I find that medical consumption responds to cost-sharing terms. A $10 increase in the primary care copay leads to a 5.4% decrease in medical consumption. Finally, I find that the cost-sharing terms of insurance have an effect on the health outcomes of patients. A $10 increase in the primary care copay leads to a 0.1 percentage point increase in inpatient mortality. Taken together, I find that a reduction in competition via a merger leads to higher primary care copays and less medical spending. At estimates of the value of a statistical life, the spending decrease is outweighed by the increase in inpatient mortality.
Competition in insurance markets affects not only the monthly premium but also the cost-sharing terms---e.g. copays and coinsurance rates--- of the offered products. These terms determine the out-of-pocket price of medical care, which may affect a patient's medical decisions and thus the patient's health outcomes. However, there is relatively little research on how competition affects cost-sharing terms and the subsequent effects on medical consumption and health. In this paper, I estimate a model of imperfect competition in Medicare Advantage that characterizes the consumer's insurance choice and medical consumption, and allows firms to set both the premium and cost-sharing terms of their products. Using rich medical claims data, the model incorporates adverse selection, moral hazard, and the effect of cost-sharing terms on consumer health. There are three main findings. First, I show that, on average, less competition leads to higher levels of cost-sharing, but a merger between multi-product firms may lead the cost-sharing levels of some products to increase and others to decrease. Second, I find that medical consumption responds to cost-sharing terms. A $10 increase in the primary care copay leads to a 5.4% decrease in medical consumption. Finally, I find that the cost-sharing terms of insurance have an effect on the health outcomes of patients. A $10 increase in the primary care copay leads to a 0.1 percentage point increase in inpatient mortality. Taken together, I find that a reduction in competition via a merger leads to higher primary care copays and less medical spending. At estimates of the value of a statistical life, the spending decrease is outweighed by the increase in inpatient mortality.
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
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 (revise & resubmit, American Journal of Health Economics)
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.
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
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 (revise & resubmit, American Journal of Health Economics)
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, 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.
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.
