Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange
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.
I would like to thank my advisers David Cutler, Jeffrey Liebman, and Ariel Pakes for extensive comments and support in writing this paper. I also thank the Massachusetts Health Connector (particularly Michael Norton, Sam Osoro, Nicole Waickman, and Marissa Woltmann) for assistance in providing and interpreting the data. I also thank Katherine Baicker, Amitabh Chandra, Jeffrey Clemens, Keith Ericson, Amy Finkelstein, Jon Gruber, Ben Handel, Nathan Hendren, Kate Ho, Sonia Jaffe, Tim Layton, Robin Lee, Greg Lewis, Tom McGuire, Joe Newhouse, Daria Pelech, Jim Rebitzer, Amanda Starc, Karen Stockley, Rich Sweeney, Jacob Wallace, Tom Wollmann, Ali Yurukoglu, and seminar participants at Boston College, the Boston Fed, CBO, Columbia, Chicago Booth, Duke, Harvard, NBER (Health Care), Northwestern, UPenn, Princeton, Stanford GSB, UCLA, UCSD, and Wash U St. Louis. I gratefully acknowledge data funding from Harvard’s Lab for Economic Applications and Policy, and Ph.D. funding support from National Institute on Aging Grant No. T32-AG000186 (via the National Bureau of Economic Research), the Rumsfeld Foundation, and the National Science Foundation Graduate Research Fellowship. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.