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Summary

Dynamic Pricing Regulation and Welfare in Insurance Markets
Author(s):
Naoki Aizawa, University of Wisconsin-Madison and NBER
Ami Ko, Georgetown University
Discussant(s):
Daniel Gottlieb, London School of Economics
Abstract:

This paper examines the impact of dynamic pricing regulation on market outcomes and social welfare in the US long-term care insurance (LTCI) market. Aizawa and Ko first provide descriptive evidence that the introduction of rate stability regulation, which limits insurers’ ability to increase premiums over the lifetime of a contract, improved rate stability while reducing product variety. To quantify this trade-off, Aizawa and Ko develop and estimate a dynamic equilibrium model of LTCI where insurers have market power and cannot commit to future premiums. Their estimates suggest that consumers’ demand for LTCI is relatively price inelastic. However, insurers do not charge a high markup due to various pricing regulations. Using the estimated model, the researchers conduct counterfactual experiments to assess the welfare effect of dynamic pricing regulation. Aizawa and Ko find that a stricter rate stability regulation lowers social welfare as the benefit from improved rate stability is outweighed by the cost from reduced product variety.

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Rationing Medicine Through Bureaucracy: Authorization Restrictions in Medicare
Author(s):
Zarek C. Brot-Goldberg, University of Chicago
Samantha Burn, Harvard University
Timothy Layton, Harvard University and NBER
Boris Vabson, Harvard University
Rationing Medicine Through Bureaucracy: Authorization Restrictions in Medicare
Author(s):
Zarek C. Brot-Goldberg, University of Chicago
Samantha Burn, Harvard University
Timothy Layton, Harvard University and NBER
Boris Vabson, Harvard University
Abstract:

High administrative costs in US health care have provoked worry among policymakers, but much of these costs are generated by managed care policies that trade off red tape against reductions in moral hazard. Brot-Goldberg, Burn, Layton, and Vabson study this trade-off for the case of prior authorization restrictions, a major source of administrative costs, among Low-Income Subsidy beneficiaries of Medicare Part D. Prior authorization restrictions require physicians to fill out paperwork in order for treatment to be covered. They reduce insurer drug spending costs but impose paperwork burdens on physicians. Using auto-assignment to randomly-chosen plans as a source of variation, Brot-Goldberg, Burn, Layton, and Vabson find that prior authorization reduces use of focal drugs by 23%. The average prior authorization restriction regime imposes a paperwork burden of $4.8 to $5.7 per patient-year, but results in $23.7 of savings on drug spending, with no apparent effect on patient health. Rather than being pure waste, paperwork burdens may reflect choices along a frontier trading off paperwork costs against program utilization costs.

Reducing Ordeals through Automatic Enrollment: Evidence from a Health Insurance Exchange
Author(s):
Mark Shepard, Harvard University and NBER
Myles Wagner, Harvard University
Abstract:

Incomplete take-up is a major concern in safety net programs, including health insurance. Studying a targeted auto-enrollment policy in Massachusetts, Shepard and Wagner find that removing hassles through a simple shift in defaults has substantial impacts, boosting enrollment 30-50% and differentially enrolling young, healthy, low-cost individuals. While auto-enrollment worsens targeting according to the classic criterion - enrolling people with lower value for insurance - this criterion is incomplete because low (private) value is correlated with low public cost and misses uncompensated care spillovers. Relative to subsidies, auto-enrollment has similar targeting properties but is 36-125% more cost-effective by avoiding new spending on inframarginal enrollees.

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Firms and Unemployment Insurance Take-Up
Author(s):
Marta Lachowska, W.E. Upjohn Institute for Employment Research
Isaac Sorkin, Stanford University and NBER
Stephen A. Woodbury, Michigan State University
Abstract:

This paper uses administrative data from Washington State to quantify the role of employers in the incomplete take-up of unemployment insurance (UI). Consistent with previous literature, nearly half of the workers who appear to be UI-eligible do not claim UI. Moreover, there is a steep income gradient in claiming. Distinctively, Lachowska, Sorkin, and Woodbury find substantial dispersion in both firm-level UI claim rates and appeals (of UI claims) rates. Firm-level claim and appeals rates are negatively correlated, which is consistent with a deterrent effect of firms' appeals on workers' claiming. Claims and appeals rates are tightly related to workers' pre-separation wage rates, and firm fixed effects explain a large share of the income gradient in take-up and appeals. The researchers show that if firms with below-median firm effects in claims rates had the median claims rate, then take-up would increase by about six percentage points. Finally, Lachowska, Sorkin, and Woodbury estimate a simple model of experience rating and claims and use it to assess the targeting properties of UI and how experience rating affects targeting and take-up. The main source of targeting error in the system arises through incomplete take-up and decreasing experience rating would increase take-up. Lachowska, Sorkin, and Woodbury also solve for the changes in experience rating that would achieve similar increases in take-up as compressing the firm effects distribution.

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The Effect of Insurance Telematics and Financial Penalties on Market-wide Moral Hazard
Author(s):
Marco Cosconati, Bank of Italy and IVASS
Discussant(s):
Yizhou Jin, University of Toronto
Abstract:

Using a unique matched insurer-insuree panel dataset that contains rich information on 4,316,647 auto insurance contracts underwritten by all Italian insurers in the period 2013:Q3-2017 with associated claims and information on insurers' loading costs, Cosconati provides empirical evidence of market-wide moral hazard. He infers moral hazard by estimating the effect of (experience rating) financial penalties and of the so-called black box--telemonitoring devices transmitting data on driving habits to the insurer--on the frequency of accidents. Cosconati disentangles moral hazard from adverse selection and state dependence by exploiting the price variations across insurers and local markets, and the black box pricing experimentation by a major insurer. Using data on paid premiums the researcher measures surcharges for provoking an accident at the insurer--level and estimate individual expected penalties, that take into account the probability of choosing a different insurer at the end of the contractual year. Cosconati finds that (i) a 1 percentage point increase in financial penalties decreases the conditional accident probability by 31 basis points--about half of the elasticity one would find by ignoring the decision to switch across insurers|and a black box reduction of 36-50 basis points, with a declining moral hazard effect in the distance driven. Cosconati does not find a significant correlation between the presence of the black box and the frequency of accidents, implying that adopters are more risky drivers than non-adopters. This counterintuitive selection pattern can be rationalized by the reduction of claims liquidation time entailed by the black box within a model in which drivers only differ in ex-ante risk.

Opportunity Unraveled: Private Information and the Missing Markets for Financing Human Capital
Author(s):
Daniel Herbst, University of Arizona
Nathaniel Hendren, Harvard University and NBER
Abstract:

Investing in college carries high returns, but comes with considerable risk. Financial products like equity contracts can mitigate this risk, yet college is typically financed through nondischargeable, government-backed student loans. This paper argues that adverse selection has unraveled private markets for college-financing contracts that mitigate risk. Herbst and Hendren use survey data on students' expected post-college outcomes to estimate their knowledge about future outcomes, and the researchers translate these estimates into their implication for adverse selection of equity contracts and several state-contingent debt contracts. Herbst and Hendren find students hold significant private knowledge of their future earnings, academic persistence, employment, and loan repayment likelihood, beyond what is captured by observable characteristics. For example, their empirical results imply that a typical college-goer must expect to pay back $1.64 in present value for every $1 of equity financing to cover the financier's costs of covering those who would adversely select their contract. Herbst and Hendren estimate that college-goers are not willing to accept these terms so that private markets unravel. Nonetheless, their framework quantifies significant welfare gains from government subsidies that would open up these missing markets and partially insure college-going risks.

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This paper was distributed as Working Paper 29214, where an updated version may be available.

Hedging and Competition
Author(s):
Erasmo Giambona, Syracuse University
Anil Kumar, Aarhus University
Gordon M. Phillips, Dartmouth College and NBER
Discussant(s):
David S. Scharfstein, Harvard University and NBER
Abstract:

Giambona, Kumar, and Phillips study how risk management through hedging impacts firms and competition among firms in the life insurance industry - an industry with over 7 Trillion in assets and over 1,000 private and public firms. Giambona, Kumar, and Phillips show that firms that are likely to face costly external finance increase hedging after staggered state-level financial reform that reduces the costs of hedging. Post reform impacted firms have lower risk and fewer negative income shocks. Product market competition is also impacted. Firms that previously are more likely to face costly external finance, lower price, increase policy sales and increase their market share post reform. The results are consistent with hedging allowing firms that face potential costly financial distress to decrease risk and become more competitive.

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This paper was distributed as Working Paper 29207, where an updated version may be available.

Opportunity Unraveled: Private Information and the Missing Markets for Financing Human Capital
Author(s):
Daniel Herbst, University of Arizona
Nathaniel Hendren, Harvard University and NBER
Abstract:

Investing in college carries high returns, but comes with considerable risk. Financial products like equity contracts can mitigate this risk, yet college is typically financed through non-dischargeable, government-backed student loans. This paper argues that adverse selection has unraveled private markets for college-financing contracts that mitigate risk. Herbst and Hendren use survey data on students' expected post-college outcomes to estimate their knowledge about future outcomes, and the researchers translate these estimates into their implication for adverse selection of equity contracts and several state-contingent debt contracts. The researchers find students hold significant private knowledge of their future earnings, academic persistence, employment, and loan repayment likelihood, beyond what is captured by observable characteristics. For example, their empirical results imply that a typical college-goer must expect to pay back $1.64 in present value for every $1 of equity financing to cover the financier's costs of covering those who would adversely select their contract. Herbst and Hendren estimate that college-goers are not willing to accept these terms so that private markets unravel. Nonetheless, their framework quantifies significant welfare gains from government subsidies that would open up these missing markets and partially insure college-going risks.

Downloads:

This paper was distributed as Working Paper 29214, where an updated version may be available.

Ambulance Taxis
Author(s):
Paul J. Eliason, Brigham Young University
Riley J. League, Duke University
Jetson Leder-Luis, Boston University
Ryan C. McDevitt, Duke University
James W. Roberts, Duke University and NBER
Abstract:

Eliason, League, Leder-Luis, McDevitt, and Roberts study the relative effectiveness of administrative regulations, criminal enforcement, and civil whistleblower lawsuits for combatting health care fraud. Between 2003 and 2017, Medicare spent $7.7 billion on 37.5 million regularly scheduled, non-emergency ambulance rides for patients traveling to and from dialysis facilities, with dozens of lawsuits alleging that Medicare reimbursed rides for patients who did not meet the requirements for receiving one. Using a novel data set and an identification strategy based on the staggered timing of regulations and lawsuits across the US, Eliason, League, Leder-Luis, McDevitt, and Roberts find that a regulation requiring prior authorization for ambulance reimbursements reduced spending much more than criminal and civil lawsuits did. Despite the sharp drop in both ambulance transports and the companies that provide them following prior authorization, patients' health outcomes did not change, indicating that most rides were not medically necessary. Their results suggest that administrative actions have a much larger impact than targeted criminal enforcement, providing novel evidence that regulations may be more cost-effective than ex post ligation for preventing health care fraud.

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A Denial a Day Keeps the Doctor Away
Author(s):
Abe Dunn, Bureau of Economic Analysis
Joshua D. Gottlieb, University of Chicago and NBER
Adam Shapiro, Federal Reserve Bank of San Francisco
Daniel J. Sonnenstuhl, University of Chicago
Pietro Tebaldi, Columbia University and NBER
Abstract:

Who bears the consequences of administrative problems in healthcare? Dunn, Gottlieb, Shapiro, Sonnenstuhl, and Tebaldi use data on repeated interactions between a large sample of US physicians and many different insurers to document the complexity of healthcare billing, and estimate its economic costs for doctors and consequences for patients. Observing the back-and-forth sequences of claims' denials and resubmissions for past visits, the researchers can estimate physicians' costs of haggling with insurers to collect payments. Combining these costs with the revenue never collected, they estimate that physicians lose 17% of Medicaid revenue to billing problems, compared with 5% for Medicare and 3% for commercial payers. Identifying off of physician movers and practices that span state boundaries, Dunn, Gottlieb, Shapiro, Sonnenstuhl, and Tebaldi find that physicians respond to billing problems by refusing to accept Medicaid patients in states with more severe billing hurdles. These hurdles are just as quantitatively important as payment rates for explaining variation in physicians' willing to treat Medicaid patients. Dunn, Gottlieb, Shapiro, Sonnenstuhl, and Tebaldi conclude that administrative frictions have first-order costs for doctors, patients, and equality of access to healthcare.

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This paper was distributed as Working Paper 29010, where an updated version may be available.

Pricing of Climate Risk Insurance: Regulatory Frictions and Cross-Subsidies
Author(s):
Sangmin Oh, University of Chicago
Ishita Sen, Harvard University
Ana-Maria Tenekedjieva, Federal Reserve Board
Discussant(s):
Katherine R.H. Wagner, University of California, Berkeley
Abstract:

Homeowners' insurance provides households financial protection from climate losses. To improve access and affordability, state regulators impose price controls on insurance companies. Using novel data, Oh, Sen, and Tenekedjieva construct a new measure of rate setting frictions for individual states and show that different states exercise varying degrees of price control, which positively correlates with how exposed a state is to climate events. In high friction states, insurers are more restricted in their ability to set rates and adjust rates less frequently and by a lower amount after experiencing climate losses. In part, insurers overcome pricing frictions by cross-subsidizing insurance across states. Oh, Sen, and Tenekedjieva show that in response to losses in high friction states, insurers increase rates in low friction states. Over time, rates get disjoint from underlying risk, and grow faster in states with low pricing frictions. Their findings have consequences for how climate risk is shared in the economy and for long-term access to insurance.

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Conflicting Interests and the Effect of Fiduciary Duty — Evidence from Variable Annuities
Author(s):
Mark L. Egan, Harvard University and NBER
Shan Ge, New York University
Johnny Tang, Harvard University
Discussant(s):
Vivek Bhattacharya, Northwestern University and NBER
Abstract:

Egan, Ge, and Tang examine the drivers of variable annuity sales and the impact of a proposed regulatory change. Variable annuities are popular retirement products with over $2 trillion in assets in the United States. Insurers typically pay brokers a commission for selling variable annuities that ranges from 0% to over 10% of investors' premium payments. Brokers earn higher commissions for selling inferior annuities, in terms of higher expenses and more ex-post complaints. Their results indicate that variable annuity sales are roughly four times as sensitive to brokers' financial interests as to investors'. To help limit conflicts of interest, the Department of Labor proposed a rule in 2016 that would hold brokers to a fiduciary standard when dealing with retirement accounts. Egan, Ge, and Tang find that after the proposed fiduciary rule, sales of high-expense variable annuities fell by 52% as sales became more sensitive to expenses and insurers increased the relative availability of low-expense products. Based on their structural model estimates, investor welfare improved as a result of the fiduciary rule under conservative assumptions.

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This paper was distributed as Working Paper 27577, where an updated version may be available.

Participants

Thomas R. Berry-Stoelzle, University of Iowa
Harun Bulut, NCIS--National Crop Insurance Services
Samantha Burn, Harvard University
Marco Cosconati, Bank of Italy and IVASS
Martin Eling, University of St. Gallen
Chuck Fang, University of Pennsylvania
Daniel M. Kaliski, University of London
Divya Kirti, International Monetary Fund
Christian Kubitza, University of Bonn
James Tyler. Leverty, University of Wisconsin-Madison
Joanne Linnerooth-Bayer, International Institute for Applied Systems Analysis
Victor Lyonnet, Ohio State University
Moshe Arye. Milevsky, York University / Schulich School of Business
Michael Murray, Insurance Services Offices, Inc.
Stanislava Nikolova, University of Nebraska-Lincoln
Radek Paluszynski, University of Houston
Richard J. Rosen, Federal Reserve Bank of Chicago
Joan Schmit, University of Wisconsin-Madison
David Schoenherr, Princeton University
Ishita Sen, Harvard University
Rene M. Stulz, Oregon State University
Ana-Maria Tenekedjieva, Federal Reserve Board
Andre F. Veiga, Imperial College London
Gordon Woo, Risk Management Solutions
Nan Zhu, Pennsylvania State University
Ivelin Zvezdov, AIR Worldwide

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