Accounting Discretion and Regulation: Evidence from Health Insurers and the Affordable Care Act
64 Pages Posted: 6 Dec 2018 Last revised: 21 Feb 2019
Date Written: January 1, 2019
Under the Patient Protection and Affordable Care Act (ACA), health insurers are required to spend a certain portion of premium revenue on policyholder benefits; the failure to do so triggers rebate payments to policyholders. The reported expenditure includes not only realized payments, but also estimated future payments for claims that have either not been reported or not been finalized. As a consequence, the ACA changed incentives for how firms estimate their claims and liabilities. We exploit pre-ACA variation in state-level regulation as well as granular claims information from insurers’ ACA filings to study how this type of regulatory oversight influences health insurer reporting. We find consistent evidence of reporting management in both the pre-ACA period and the post-ACA period. Specifically, we find that 1) prior to the ACA, insurers subject to state-level regulation overstated claims; 2) the ACA’s enactment led to previously-unregulated insurers increasing their claims overstatements; and 3) in the post-ACA period, insurers below ACA thresholds have systematically overstated their claims, leading to an estimated 10% underpayment of policyholder rebates. Our results show real and measurable consequences of reporting management, and illustrate how product-market regulation based on financial information is subject to manipulation by regulated firms.
Keywords: Earnings Management, Regulation, Health Insurance
JEL Classification: G18, G22, I13, I18, M41, M48
Suggested Citation: Suggested Citation