IDEAS home Printed from https://ideas.repec.org/p/pen/papers/19-020.html
   My bibliography  Save this paper

Lock-in in Dynamic Health Insurance Contracts: Evidence from Chile

Author

Listed:
  • Juan Pablo Atal

    () (University of Pennsylvania)

Abstract

Long-term health insurance contracts have the potential to efficiently insure against reclassification risk, but at the expense of other limitations like provider lock-in. This paper empirically investigates the workings of long-term contracts which are subject to this trade-off. Individuals are shielded against premium increases and coverage denial as long as they stay with their initial contract, but those that become higher risk are subject to premium increases or coverage denials upon switching, potentially leaving them locked-in with their original network of providers. I provide the first empirical evidence on the importance of this phenomenon using administrative panel data from the universe of the private health insurance market in Chile, where competing insurers o?er long term contracts. I fit a structural model to yearly plan choices, and am able to jointly estimate evolving preferences for different insurance companies and supply-side underwriting in the form of premium risk-rating and coverage denial. To quantify the welfare effects of lock-in, I compare simulated choices under the current rules to those in a counterfactual scenario with no underwriting. The results show that consumers would be willing to pay around 13 percent more in yearly premiums to avoid lock-in. Finally, I study a counterfactual scenario where long-term contracts are replaced with community-rated spot contracts, and I find only minor general-equilibrium effects on premiums and on the allocation of individuals across insurers. I argue that these small effects are the result of large levels of preference heterogeneity uncorrelated to risk.

Suggested Citation

  • Juan Pablo Atal, 2019. "Lock-in in Dynamic Health Insurance Contracts: Evidence from Chile," PIER Working Paper Archive 19-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:19-020
    as

    Download full text from publisher

    File URL: https://economics.sas.upenn.edu/system/files/working-papers/19-020%20PIER%20Paper%20Submission.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. M. Kate Bundorf & Jonathan Levin & Neale Mahoney, 2012. "Pricing and Welfare in Health Plan Choice," American Economic Review, American Economic Association, vol. 102(7), pages 3214-3248, December.
    2. Keane, Michael, 1993. "Simulation estimation for panel data models with limited dependent variables," MPRA Paper 53029, University Library of Munich, Germany.
    3. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.),Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    4. Jason Abaluck & Jonathan Gruber, 2011. "Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," American Economic Review, American Economic Association, vol. 101(4), pages 1180-1210, June.
    5. Duarte, Fabian, 2012. "Price elasticity of expenditure across health care services," Journal of Health Economics, Elsevier, vol. 31(6), pages 824-841.
    6. Geweke, John & Keane, Michael, 2001. "Computationally intensive methods for integration in econometrics," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.),Handbook of Econometrics, edition 1, volume 5, chapter 56, pages 3463-3568, Elsevier.
    7. Liran Einav & Amy Finkelstein, 2011. "Selection in Insurance Markets: Theory and Empirics in Pictures," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 115-138, Winter.
    8. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, December.
    9. Nathaniel Hendren, 2013. "Private Information and Insurance Rejections," Econometrica, Econometric Society, vol. 81(5), pages 1713-1762, September.
    10. Keith M. Marzilli Ericson, 2014. "Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 38-64, February.
    11. Krueger, Dirk & Uhlig, Harald, 2006. "Competitive risk sharing contracts with one-sided commitment," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1661-1691, October.
    12. Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance," American Economic Review, American Economic Association, vol. 95(2), pages 224-228, May.
    13. Igal Hendel & Alessandro Lizzeri, 2003. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 299-328.
    14. Juan Pablo Atal & Hanming Fang & Martin Karlsson & Nicolas R. Ziebarth, 2019. "Exit, Voice, or Loyalty? An Investigation Into Mandated Portability of Front‐Loaded Private Health Plans," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(3), pages 697-727, September.
    15. Geweke, John F. & Keane, Michael P. & Runkle, David E., 1997. "Statistical inference in the multinomial multiperiod probit model," Journal of Econometrics, Elsevier, vol. 80(1), pages 125-165, September.
    16. Jason Abaluck & Jonathan Gruber, 2011. "Heterogeneity in Choice Inconsistencies among the Elderly: Evidence from Prescription Drug Plan Choice," American Economic Review, American Economic Association, vol. 101(3), pages 377-381, May.
    17. Michael D. Grubb & Matthew Osborne, 2015. "Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock," American Economic Review, American Economic Association, vol. 105(1), pages 234-271, January.
    18. Cristian Pardo & Whitney Schott, 2012. "Public versus private: evidence on health insurance selection," International Journal of Health Economics and Management, Springer, vol. 12(1), pages 39-61, March.
    19. Jonathan D. Ketcham & Claudio Lucarelli & Eugenio J. Miravete & M. Christopher Roebuck, 2012. "Sinking, Swimming, or Learning to Swim in Medicare Part D," American Economic Review, American Economic Association, vol. 102(6), pages 2639-2673, October.
    20. Christina M. Dalton & Gautam Gowrisankaran & Robert Town, 2015. "Salience, Myopia, and Complex Dynamic Incentives: Evidence from Medicare Part D," NBER Working Papers 21104, National Bureau of Economic Research, Inc.
    21. Herring, Bradley & Pauly, Mark V., 2006. "Incentive-compatible guaranteed renewable health insurance premiums," Journal of Health Economics, Elsevier, vol. 25(3), pages 395-417, May.
    22. Annette Hofmann & Mark Browne, 2013. "One-sided commitment in dynamic insurance contracts: Evidence from private health insurance in Germany," Journal of Risk and Uncertainty, Springer, vol. 46(1), pages 81-112, February.
    23. Blough, David K. & Madden, Carolyn W. & Hornbrook, Mark C., 1999. "Modeling risk using generalized linear models," Journal of Health Economics, Elsevier, vol. 18(2), pages 153-171, April.
    24. Benjamin R. Handel, 2013. "Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts," American Economic Review, American Economic Association, vol. 103(7), pages 2643-2682, December.
    25. Andrew Ching & Tülin Erdem & Michael Keane, 2009. "The price consideration model of brand choice," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(3), pages 393-420, April.
    26. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    27. Hajivassiliou, Vassilis & McFadden, Daniel & Ruud, Paul, 1996. "Simulation of multivariate normal rectangle probabilities and their derivatives theoretical and computational results," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 85-134.
    28. Ben Handel & Igal Hendel & Michael D. Whinston, 2015. "Equilibria in Health Exchanges: Adverse Selection versus Reclassification Risk," Econometrica, Econometric Society, vol. 83(4), pages 1261-1313, July.
    29. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-473, June.
    30. Buntin, Melinda Beeuwkes & Zaslavsky, Alan M., 2004. "Too much ado about two-part models and transformation?: Comparing methods of modeling Medicare expenditures," Journal of Health Economics, Elsevier, vol. 23(3), pages 525-542, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Juan Pablo Atal & Hanming Fang & Martin Karlsson & Nicolas R. Ziebarth, 2020. "Long-Term Health Insurance: Theory Meets Evidence," PIER Working Paper Archive 20-009, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

    More about this item

    Keywords

    Health Insurance; Guaranteed-Renewability; Lock-in;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pen:papers:19-020. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Administrator). General contact details of provider: http://edirc.repec.org/data/deupaus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.