Essays on Health Insurance Market Design

Marone, Victoria

doi:https://doi.org/10.21985/n2-2pqt-g155

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Essays on Health Insurance Market Design

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This dissertation studies three aspects of health insurance market regulation and design. Chapter 1 (which is joint work with Steve Cicala and Ethan Leiber) studies a regulatory mechanism used to constrain insurer market power. The mechanism targets health insurers' Medical Loss Ratio, which is the share of premiums spent on medical claims. As part of the goal of reducing the cost of health insurance, the Affordable Care Act introduced minimum Medical Loss Ratio provisions for all health insurance sold in fully-insured commercial markets as of 2011, thereby explicitly capping insurer profit margins (but not levels). This cap was binding for many insurers, with over $1 billion of rebates paid back to consumers in the first year of implementation. We model this constraint imposed upon a monopolistic insurer, and derive distortions analogous to those created under cost of service regulation. We test the implications of the model empirically using administrative data from 2005-2013, with insurers persistently above the minimum Medical Loss Ratio threshold serving as the control group in a difference-in-difference design. We find that rather than resulting in reduced premiums, insurer claims increased nearly one-for-one with distance below the regulatory threshold: 7% in the market for individual policies, and 2% in the group market. Chapter 2 (which is joint work with Adrienne Sabety) studies the question of whether an efficiency-maximizing regulator would wish to offer consumers a choice over health insurance coverage levels. Such a choice––which we term "vertical choice"––is widely available in U.S. health insurance markets today, but there is limited evidence of its effect on welfare. The socially efficient level of coverage for a given consumer optimally trades off the value of risk protection and the social cost from moral hazard. But providing choice does not necessarily lead consumers to select their efficient coverage level. We show that in regulated competitive health insurance markets, vertical choice should be offered only if consumers with higher willingness to pay for insurance have a higher efficient coverage level. We test for this condition empirically using administrative data from a large employer representing 45,000 households. We estimate a model of consumer demand for health insurance and healthcare utilization that incorporates heterogeneity in health, risk aversion, and moral hazard. Our estimates imply substantial heterogeneity in efficient coverage level, but we do not find that households with higher efficient coverage levels have higher willingness to pay. It is therefore optimal to offer only a single coverage level. Relative to a status quo with vertical choice, offering only the optimal single level of coverage increases welfare by $302 per household per year. Finally, Chapter 3 explores optimal health insurance provision when there is a heterogeneous healthcare product. As in Chapter 2, I consider a setting in which there is both adverse selection and moral hazard, but here I extend the model to give consumers a choice over the quality of healthcare they utilize. I focus on the dimension of healthcare quality that relates directly to patient comfort (e.g., privacy, amenities, or wait time). The theoretical model needed to capture differentiated healthcare is not fundamentally different than the one used in Chapter 2, but I provide a new, slightly more general formulation that helps show the model in this new light. I then provide a simple parameterization of the model. There are two key differences between my parameterization in this setting and parameterizations used in prior work: (i) healthcare utilization options are discrete (corresponding to discrete healthcare providers), and (ii) consumers are heterogeneous in the healthcare utilization choice they would make absent insurance. These differences raise some interesting issues regarding the normative implications of the model, which I begin to investigate. Allowing consumers to hold and express different preferences for healthcare quality is critical for modeling health insurance in societies with highly unequal incomes. I find it a promising direction for future work.

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