NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Insurance

April 7-8, 2017
Benjamin R. Handel of University of California, Berkeley and Motohiro Yogo of Princeton University, Organizers

Michael Geruso, University of Texas at Austin and NBER, and Timothy J. Layton and Daniel Prinz, Harvard University

Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges (NBER Working Paper No. 22832)

By steering patients to cost-effective substitutes, the tiered design of prescription drug formularies can improve the efficiency of healthcare consumption in the presence of moral hazard. However, a long theoretical literature describes how contract design can also be used to screen consumers by profitability. In this paper, Geruso, Layton, and Prinz study this type of screening in the ACA Health Insurance Exchanges. They first show that despite large regulatory transfers that neutralize selection incentives for most consumer types, some consumers are unprofitable in a way that is predictable by their prescription drug demand. Then, using a difference-in-differences strategy that compares Exchange formularies where these selection incentives exist to employer plan formularies where they do not, authors show that Exchange insurers design formularies as screening devices that are differentially unattractive to unprofitable consumer types. This results in inefficiently low levels of coverage for the corresponding drugs in equilibrium. Although this type of contract distortion has been highlighted in the prior theoretical literature, until now empirical evidence has been rare. The impact on out-of-pocket costs for consumers affected by the distortion is substantial—potentially thousands of dollars per year—and the distortion creates an equilibrium in which contracts that efficiently trade off moral hazard and risk protection cannot exist.


Lorenzo Casaburi, University of Zurich, and Jack J. Willis, Harvard University

Time vs. State in Insurance: Experimental Evidence from Contract Farming in Kenya

The gains from insurance arise from the transfer of income across states. Yet, by requiring that the premium be paid upfront, standard insurance products also transfer income across time. Casaburi and Willis show that this intertemporal transfer can help explain low insurance demand, especially among the poor, and in a randomized control trial in Kenya they test a crop insurance product which removes it. The product is interlinked with a contract farming scheme: as with other inputs, the buyer of the crop offers the insurance and deducts the premium from farmer revenues at harvest time. The take-up rate is 72%, compared to 5% for the standard upfront contract, and take-up is highest among poorer farmers. Additional experiments and outcomes indicate that liquidity constraints, present bias, and counter-party risk are all important constraints on the demand for standard insurance. Finally, evidence from a natural experiment in the United States, exploiting a change in the timing of the premium payment for Federal Crop Insurance, shows that the transfer across time also affects insurance adoption in developed countries.


Zach Y. Brown, Columbia University

An Empirical Model of Price Transparency and Markups in Health Care

In the market for health care services, consumers often do not know exact prices when choosing where to receive care. This makes it difficult to shop around for low price options, potentially reducing effective consumer price elasticity and leading to higher prices. How does price transparency affect equilibrium prices and welfare? To answer this question, this paper develops a demand model that separates underlying consumer preferences from consumer uncertainty about prices. Identification comes from quasi-experimental variation in price information resulting from the introduction of a website aimed at informing consumers. Brown then combines the model of demand with a model of bargaining between medical providers and insurers to examine how price transparency affects equilibrium prices. Using administrative data on medical imaging claims and website usage, model estimates and difference-in-differences estimates both imply that the website reduces health care spending by 3 to 4 percent. Brown then uses the model to examine the effects of price transparency more generally. In counterfactual simulations, he finds that price transparency would generate a substantial reduction in equilibrium prices if a larger fraction of consumers in the market were informed. Combining the price transparency website with high cost sharing would give individuals more incentive to use the price transparency tool, reducing health care spending by 18 percent.

Colleen Carey, Cornell University

A Time to Harvest: Evidence on Consumer Choice Frictions from a Payment Revision in Medicare Part D

In many federally-subsidized insurance markets, insurers are paid on the basis of enrollee diagnoses; in principle, insurers are indifferent between individuals with different diagnoses due to this system of diagnosis-specific payments. Between 2010 and 2011, the diagnosis-specific payment system in Medicare Part D was revised, changing an insurer's incentive to enroll an individual with a particular diagnosis. This research uses the response of insurers to the payment update to develop evidence on consumer choice frictions. Carey first documents that, consistent with prior theory, Part D insurers improved benefits for drugs that treat diagnoses with positive payment updates; conversely, insurers made coverage for diagnoses receiving negative payment updates less generous. Carey computes that an extra dollar in diagnosis-specific payments reduced out-of-pocket costs for the typical enrollee’s demand by about $0.20, a measure of pass-through in this market. Carey then develops an analytically tractable model of dynamic insurer benefit design in the presence of consumer switching costs. In this setting, insurers receiving higher payments balance improving benefits to attract new enrollment and harvesting from locked-in enrollees; the latter effect is larger when the insurer has a large market share. Empirically, Carey finds that Part D insurers with a large share of a diagnosis responded less strongly to the payment revision. Relative to insurers with a small share of a diagnosis, those with a large share reduced out-of-pocket costs about one-third less when receiving a positive payment update. This analysis provides indirect evidence of the presence of demand-side choice frictions using only supply-side behavior.


Hanming Fang, University of Pennsylvania and NBER, and Zenan Wu, Peking University

Multidimensional Private Information, Market Structure and Insurance Markets (NBER Working Paper No. 22773)

A large empirical literature found that the correlation between insurance purchase and ex post realization of risk is often statistically insignificant or negative. This is inconsistent with the predictions from the classic models of insurance a la Akerlof (1970), Pauly (1974), and Rothschild and Stiglitz (1976) where consumers have one-dimensional heterogeneity in their risk types. It is suggested that selection based on multidimensional private information, e.g., risk and risk preference types, may be able to explain the empirical findings. In this paper, Fang and Wu systematically investigate whether selection based on multidimensional private information in risk and risk preferences, can, under different market structures, result in a negative correlation in equilibrium between insurance coverage and ex post realization of risk. They show that if the insurance market is perfectly competitive, selection based on multidimensional private information does not result in negative correlation property in equilibrium, unless there is a sufficiently high loading factor. If the insurance market is monopolistic or imperfectly competitive, however, the researchers show that it is possible to generate negative correlation property in equilibrium when risk and risk preference types are sufficiently negative dependent, a notion they formalize using the concept of copula. The researchers also clarify the connections between some of the important concepts such as adverse/advantageous selection and positive/negative correlation property.


Kate Ho, Columbia University and NBER, and Robin S. Lee, Harvard University and NBER

Equilibrium Provider Networks: Bargaining and Exclusion in Health Care Markets

Why do insurers choose to exclude medical providers, and when would this be socially desirable? Ho and Lee examine network design from the perspective of a profit maximizing insurer and a social planner in order to evaluate the effects of narrow networks and restrictions on their use — a form of quality regulation. An insurer may wish to exclude hospitals in order to steer patients to less expensive providers, cream-skim enrollees, and negotiate lower reimbursement rates. In addition to the standard quality distortion arising from market power, there is a pecuniary distortion introduced when insurers commit to restricted networks in order to negotiate lower rates. The researchers introduce a new bargaining solution concept for bilateral oligopoly, Nash-in-Nash with Threat of Replacement, that captures such bargaining incentives and rationalizes observed network exclusion. Pairing their framework with hospital and insurance demand estimates from Ho and Lee (forthcoming), the researchers compare social, consumer, and insurer optimal networks for the largest non-integrated HMO carrier in California across 14 geographic markets. Both the insurer and consumers prefer narrower networks than the social planner in most markets: the insurer benefits from lower reimbursement rates (almost 50% in some markets), and passes a portion of the savings along in the form of lower premiums. However, the social planner may prefer a fuller network if it encourages the utilization of more efficient insurers and providers. The researchers argue that the appropriateness of network regulation is context specific, and will depend on premium setting constraints and the generosity and efficiency of alternative insurance products.


 
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