Inertia, Market Power, and Adverse Selection in Health Insurance: Evidence from the ACA Exchanges
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.
We are grateful to Matthew Grennan, Ian McCarthy, Melinda Pitts, Daniel Prinz, Amanda Starc, and Robert Town, and to audiences at Emory University and the Southeastern Health Economics Working Group, for helpful discussions and feedback. Sam Wunderly, Jett Pettus, and Sergio Andres Florez Orrego provided excellent research assistance. Daniel Polsky received consulting fees from Extend Health. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.