Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges

80 Pages Posted: 10 Nov 2016 Last revised: 11 Oct 2017

Michael Geruso

University of Texas at Austin; National Bureau of Economic Research (NBER)

Timothy J. Layton

Harvard Medical School - Department of Health Care Policy; National Bureau of Economic Research

Daniel Prinz

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2017

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: screening, selection, risk adjustment, contract design, formulary

JEL Classification: I11, I13, I18

Suggested Citation

Geruso, Michael and Layton, Timothy J. and Prinz, Daniel, Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges (October 10, 2017). Available at SSRN: https://ssrn.com/abstract=2867542 or http://dx.doi.org/10.2139/ssrn.2867542

Michael Geruso (Contact Author)

University of Texas at Austin ( email )

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Timothy J. Layton

Harvard Medical School - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel Prinz

Harvard University ( email )

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