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Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D

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  • Maria Polyakova

Abstract

I take advantage of regulatory and pricing dynamics in Medicare Part D to empirically explore interactions among adverse selection, switching costs, and regulation. I first document novel evidence of adverse selection and switching costs within Part D using detailed administrative data. I then estimate a contract choice and pricing model in order to quantify the importance of switching costs for risk-sorting, and for policies that may affect risk sorting. I first find that in Part D, switching costs help sustain an adversely-selected equilibrium and are likely to mute the ability of ACA policies to improve risk allocation across contracts, leading to higher premiums for some enrollees. I then estimate that, overall, decreasing the cost of active decision-making in the Part D environment could lead to a substantial gain in consumer surplus of on average $400-$600 per capita, which is around 20%-30% of average annual per capita drug spending.

Suggested Citation

  • Maria Polyakova, 2015. "Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D," NBER Working Papers 21541, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21541
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    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I1 - Health, Education, and Welfare - - Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L78 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Government Policy

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