Inertia, Market Power, and Adverse Selection in Health Insurance: Evidence from the ACA Exchanges

Abstract

We study how inertia interacts with market power and adverse selection in health insurance.
We incorporate inertia into a model of plan selection and price competition, and estimate it using
data from the California ACA exchange. We estimate inertia costs equaling 43% of average
premiums. Our simulations indicate that inertia exacerbates market power, but has minimal
interaction with selection. Eliminating inertia reduces average premiums by 9.5%. Maintaining
premium-linked subsidies or reducing consumer churn increases the impact of inertia by
enhancing market power. Provider network attachment is an important impediment to plan
switching, but substantial inertia remains after accounting for networks.

Keywords: ACA, managed competition, market power, inertia, adverse selection

JEL Classification: G22, I11, I13, L1