Inertia, Market Power, and Adverse Selection in Health Insurance: Evidence from the ACA Exchanges
54 Pages Posted: 23 Aug 2021 Last revised: 24 Aug 2021
Date Written: August 20, 2021
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: ACA, managed competition, market power, inertia, adverse selection
JEL Classification: G22, I11, I13, L1
Suggested Citation: Suggested Citation