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

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  • 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
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    References listed on IDEAS

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    Cited by:

    1. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
    2. 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.

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    More about this item

    Keywords

    Health Insurance; Guaranteed-Renewability; Lock-in;
    All these keywords.

    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

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