Working Paper: NBER ID: w29097
Authors: Evan Saltzman; Ashley Swanson; Daniel Polsky
Abstract: We study how inertia interacts with market power and adverse selection in managed competition health insurance markets. We use consumer-level data to estimate a model of the California ACA exchange, in which four firms dominate the market and risk adjustment is in place to manage selection. We estimate high inertia costs, equal to 44% of average premiums. Although eliminating inertia exacerbates adverse selection, it significantly reduces market power such that average premiums decrease 13.2% and annual per-capita welfare increases $902. These effects are substantially smaller in settings without market power and/or risk adjustment. Moreover, converting the ACA's premium-linked subsidies to vouchers mitigates the impact of inertia by reducing market power, whereas reducing high consumer churn in the ACA exchanges increases the impact of inertia by enhancing market power. The impact of inertia is not sensitive to provider network generosity, despite greater consumer attachment to plans with more differentiated provider networks.
Keywords: Health Insurance; Inertia; Market Power; Adverse Selection; ACA Exchanges
JEL Codes: G22; I11; I13; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inertia (D52) | high costs (D49) |
| eliminating inertia (C69) | exacerbates adverse selection (D82) |
| eliminating inertia (C69) | reduces market power (D49) |
| reducing market power (D49) | decrease in average premiums (G52) |
| reducing market power (D49) | increase in annual per-capita welfare (D69) |
| inertia (D52) | mitigates adverse selection (D82) |
| converting ACA's premium-linked subsidies to vouchers (G52) | reduces market power (D49) |
| reducing consumer churn (D16) | increases impact of inertia (F62) |
| impact of inertia (F69) | not sensitive to provider network generosity (H49) |