Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges
80 Pages Posted: 10 Nov 2016 Last revised: 11 Oct 2017
Date Written: October 10, 2017
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: Suggested Citation