A change of plans: Switching costs in the procurement of health insurance

The provision of public health insurance through regulated markets requires a dynamic procurement of insurers over time. Using data from Medicaid managed care bids, I study the impacts of regulators’ decision to drop an insurer from the market on health care use among affected enrollees, who must switch to another health plan. Using a difference-in-differences framework, I find that after a plan is replaced, enrollees from the exiting plan have fewer visits to primary care physicians, lower utilization of prescription drugs, including those for chronic conditions, and more hospital admissions. These disruptions disproportionately affect sicker enrollees, particularly children and non-white beneficiaries. In the year following the exit, insurers’ spending on enrollees from exiting plans is 7% lower than the pre-exit baseline. Changes in provider networks and drug formularies may serve as mechanisms.