Working Paper: NBER ID: w30719
Authors: Amanda R. Kreider; Timothy J. Layton; Mark Shepard; Jacob Wallace
Abstract: Health plans for the poor increasingly limit access to specialty hospitals. We investigate the role of adverse selection in generating this equilibrium among private plans in Medicaid. Studying a network change, we find that covering a top cancer hospital causes severe adverse selection, increasing demand for a plan by 50% among enrollees with cancer versus no impact for others. Medicaid’s fixed insurer payments make offsetting this selection, and the contract distortions it induces, challenging, requiring either infeasibly high payment rates or near-perfect risk adjustment. By contrast, a small explicit bonus for covering the hospital is sufficient to make coverage profitable.
Keywords: Adverse selection; Medicaid; Network design; Health economics
JEL Codes: H51; I11; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Addition of a specialty cancer hospital to a Medicaid plan's network (I18) | Significant increase in enrollment among cancer patients (I23) |
| Significant increase in enrollment among cancer patients (I23) | Concentration of sicker patients within the plan (I11) |
| Concentration of sicker patients within the plan (I11) | Increased costs for the insurer (G52) |
| Insurer's decision to drop the hospital from the network (I11) | Adverse selection effect (D82) |
| Adverse selection effect (D82) | Challenges in sustaining coverage for specialty hospitals under fixed payment structures (I11) |