NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange

Mark Shepard

NBER Working Paper No. 22600
Issued in September 2016
NBER Program(s):Health Care Program, Industrial Organization Program, Public Economics Program

Health insurers increasingly compete on their covered networks of medical providers. Using data from Massachusetts’ pioneer insurance exchange, I find substantial adverse selection against plans covering the most prestigious and expensive “star” hospitals. I highlight a theoretically distinct selection channel: these plans attract consumers loyal to the star hospitals and who tend to use their high-price care when sick. Using a structural model, I show that selection creates a strong incentive to exclude star hospitals but that standard policy solutions do not improve net welfare. A key reason is the connection between selection and moral hazard in star hospital use.

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Document Object Identifier (DOI): 10.3386/w22600

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