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

See all articles by Evan Saltzman

Evan Saltzman

Emory University - Department of Economics

Ashley Swanson

Columbia University - Columbia Business School; NBER

Daniel Polsky

Bloomberg School of Public Health, Department of Health Policy and Management, Johns Hopkins University; Johns Hopkins University - Carey Business School

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Date Written: August 20, 2021

Abstract

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

Saltzman, Evan and Swanson, Ashley and Polsky, Daniel, Inertia, Market Power, and Adverse Selection in Health Insurance: Evidence from the ACA Exchanges (August 20, 2021). Available at SSRN: https://ssrn.com/abstract=3908686 or http://dx.doi.org/10.2139/ssrn.3908686

Evan Saltzman

Emory University - Department of Economics ( email )

1602 Fishburne Drive
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Ashley Swanson (Contact Author)

Columbia University - Columbia Business School ( email )

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New York, NY 10027
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NBER ( email )

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Daniel Polsky

Bloomberg School of Public Health, Department of Health Policy and Management, Johns Hopkins University ( email )

624 North Broadway
Baltimore, MD 21205
United States

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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