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, July 2021 (under review)
In the presence of adverse selection, firms have an incentive to offer products that appeal to low-cost consumers and lead high-cost consumers to purchase insurance elsewhere. This incentive is worst in highly competitive markets and absent in a monopoly. Through this interaction, regulations to address adverse selection and competition policy should be considered complements. This paper estimates a model of imperfect competition in the non-group health insurance market that directly characterizes the relationship between adverse selection and market power using novel choice data from a private online marketplace and a risk prediction model. The largest welfare cost comes from high markups. Current policies targeting adverse selection are successful in reducing the welfare cost of extensive margin selection and inefficient sorting. However, these policies also increase the potential harm of mergers, and in the most concentrated markets, the firms recapture much of the added surplus through higher markups.
Sources of Inertia in Health Plan Choice in the Individual Health Insurance Market (with Coleman Drake and Bryan Dowd),
March 2020 (revise & resubmit, Journal of Public Economics)
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 Demand for Individual Insurance: Evidence from a Private Online Marketplace (with Roger Feldman and Stephen Parente),
May 2021 (forthcoming, American Journal of Health Economics)
We use a novel data set from a private online marketplace to estimate the demand for individual health insurance among a set comprising many high-income consumers across 18 states. We find that consumers earning more than 4 times the federal poverty level are willing to pay $30 to $135 per month to increase the actuarial value of their insurance by 10 percentage points, much less than low-income consumers. High-income consumers are also less likely to forgo insurance as a result of a premium increase. These results are important for understanding the effect of health reform proposals targeting higher-income populations.
In the presence of adverse selection, firms have an incentive to offer products that appeal to low-cost consumers and lead high-cost consumers to purchase insurance elsewhere. This incentive is worst in highly competitive markets and absent in a monopoly. Through this interaction, regulations to address adverse selection and competition policy should be considered complements. This paper estimates a model of imperfect competition in the non-group health insurance market that directly characterizes the relationship between adverse selection and market power using novel choice data from a private online marketplace and a risk prediction model. The largest welfare cost comes from high markups. Current policies targeting adverse selection are successful in reducing the welfare cost of extensive margin selection and inefficient sorting. However, these policies also increase the potential harm of mergers, and in the most concentrated markets, the firms recapture much of the added surplus through higher markups.
Sources of Inertia in Health Plan Choice in the Individual Health Insurance Market (with Coleman Drake and Bryan Dowd),
March 2020 (revise & resubmit, Journal of Public Economics)
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 Demand for Individual Insurance: Evidence from a Private Online Marketplace (with Roger Feldman and Stephen Parente),
May 2021 (forthcoming, American Journal of Health Economics)
We use a novel data set from a private online marketplace to estimate the demand for individual health insurance among a set comprising many high-income consumers across 18 states. We find that consumers earning more than 4 times the federal poverty level are willing to pay $30 to $135 per month to increase the actuarial value of their insurance by 10 percentage points, much less than low-income consumers. High-income consumers are also less likely to forgo insurance as a result of a premium increase. These results are important for understanding the effect of health reform proposals targeting higher-income populations.
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.
