Working Paper: NBER ID: w22832
Authors: Michael Geruso; Timothy J. Layton; Daniel Prinz
Abstract: We study insurers’ use of prescription drug formularies to screen consumers in the ACA Health Insurance Exchanges. We begin by showing that Exchange risk adjustment and reinsurance succeed in neutralizing selection incentives for most, but not all, consumer types. A minority of consumers, identifiable by demand for particular classes of prescription drugs, are predictably unprofitable. We then show that contract features relating to these drugs are distorted in a manner consistent with multi-dimensional screening. The empirical findings support a long theoretical literature examining how insurance contracts offered in equilibrium can fail to optimally trade-off risk protection and moral hazard.
Keywords: health insurance; ACA; screening; formularies; risk adjustment
JEL Codes: I11; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ACA's risk adjustment and reinsurance systems (G52) | neutralizing selection incentives (H23) |
| payment errors (E42) | incentives for insurers to design formularies unattractive to unprofitable groups (G52) |
| payment errors (E42) | systematic distortion in formulary design (C46) |
| specific drug classes (L65) | higher barriers to access (I24) |
| insurers' responses to payment errors (G52) | adjusting coverage generosity (G52) |
| insurers' understanding of financial incentives (G52) | adjusting coverage generosity (G52) |