Working Paper: NBER ID: w17459
Authors: Benjamin R. Handel
Abstract: This paper investigates consumer switching costs in the context of health insurance markets, where adverse selection is a potential concern. Though previous work has studied these phenomena in isolation, they interact in a way that directly impacts market outcomes and consumer welfare. Our identification strategy leverages a unique natural experiment that occurred at a large firm where we also observe individual-level panel data on health insurance choices and medical claims. We present descriptive results to show that (i) switching costs are large and (ii) adverse selection is present. To formalize this analysis we develop and estimate a choice model that jointly quantifies switching costs, risk preferences, and ex ante health risk. We use these estimates to study the welfare impact of an information provision policy that nudges consumers toward better decisions by reducing switching costs. This policy increases welfare in a naive setting where insurance plan prices are held fixed. However, when insurance prices change endogenously to reflect updated enrollee risk pools, the same policy substantially exacerbates adverse selection and reduces consumer welfare, doubling the existing welfare loss from adverse selection.
Keywords: Health Insurance; Adverse Selection; Switching Costs; Consumer Behavior; Welfare Analysis
JEL Codes: D81; D82; D83; G22; I11; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Switching costs (D23) | Plan choices (G52) |
| Adverse selection (D82) | Coverage options (G52) |
| Information provision policy (M38) | Consumer welfare (fixed prices) (D41) |
| Information provision policy (M38) | Consumer welfare (adjusted prices) (D69) |