Working Papers

Kreider, Amanda, Timothy Layton, Mark Shepard, and Jacob Wallace. Working Paper. “Adverse Selection and Network Design Under Regulated Plan Prices: Evidence from Medicaid”. Abstract
Health plans for the poor increasingly limit access to specialty hospitals. We investigate the role of adverse selection in generating this equilibrium among private plans in Medicaid. Studying a network change, we find that covering a top cancer hospital causes severe adverse selection, increasing demand for a plan by 50% among enrollees with cancer versus no impact for others. Medicaid’s fixed insurer payments make offsetting this selection, and the contract distortions it induces, challenging, requiring either infeasibly high payment rates or near-perfect risk adjustment. By contrast, a small explicit bonus for covering the hospital is sufficient to make coverage profitable
Pakes, Ariel, Jack Porter, Mark Shepard, and Sophie Calder-Wang. Working Paper. “Unobserved Heterogeneity, State Dependence, and Health Plan Choices”. NBER WP #29025 Abstract
We provide a new method to empirically analyze discrete choice models with state dependence and individual-by-product fixed effects, and use it to analyze consumer choices in a policy-relevant environment (a subsidized health insurance exchange). The method infers state dependence from consumers' switching choices in response to changes in product attributes. Moment inequalities are constructed that do not depend on the fixed effects and do not rely on assumptions about initial conditions.  The method infers much smaller switching costs on the health insurance exchange than would be inferred from standard logit and/or random effects methods.  A counterfactual policy evaluation illustrates that the policy implications of this difference are substantive.
Policymakers can encourage public program enrollment through either financial incentives or streamlined enrollment. We study a defaults policy that streamlines health insurance take-up by auto-enrolling qualifying individuals who fail to respond when asked to select a health plan. This “targeted” auto-enrollment policy has a major impact, increasing enrollment by 30-50% and differentially enrolling young, healthy, low-cost people, with little evidence of improper enrollment of the already-insured. We evaluate the policy's tradeoffs using a model of auto-enrollment as removing a non-price ordeal to take-up. Consistent with the classic rationale for ordeals, marginal enrollees have attributes suggesting low (private) value of insurance. But the same attributes correlate with low public costs, making the targeting efficiency case less clear. Relative to financial subsidies, auto-enrollment has similar targeting properties but is 36-125% more cost-effective by avoiding new spending on inframarginal enrollees.


Economics Journal Articles

Shepard, Mark, and Ethan Forsgren. Forthcoming. “Do Insurers Respond to Active Purchasing? Evidence from the Massachusetts Health Insurance Exchange.” Journal of Risk and Insurance. Abstract
As the ACA Marketplaces face continued challenges with high premiums and limited insurer competition, there is significant interest in how policymakers can stabilize markets and control costs. We describe a unique set of active purchasing policies used by Massachusetts’ health insurance exchange to shape the rules of competition and reward lower-price insurers with additional customers. In contrast to the typical focus on recruiting new insurers to an exchange, Massachusetts focused on shaping insurer incentives by creating a series of carrots and sticks for setting prices below certain thresholds or below other insurers’ prices. We provide evidence that insurer pricing was significantly influenced by active purchasing policies. Between 2010 and 2013, over 80% of insurer prices were set exactly at or within 1% of pricing thresholds created by active purchasing policies. One key “limited choice” policy—which restricted the choice set of fully-subsidized consumers to the two cheapest plans—was associated with a 16-20% reduction in average insurance prices relative to comparison insurance markets in 2012-2014. Insurers achieved these price cuts partly through cost reductions via narrower provider networks and partly through reduced profit margins. The state’s slower price growth continued during the ACA’s first years, with the Connector having among the lowest benchmark premiums of any state starting in 2017.
Geruso, Michael, Timothy J. Layton, Grace McCormack, and Mark Shepard. Forthcoming. “The Two Margin Problem in Insurance Markets.” Review of Economics and Statistics. Abstract

Insurance markets often feature consumer sorting along both an extensive margin (whether to buy) and an intensive margin (which plan to buy). We present a new graphical theoretical framework that extends the workhorse model to incorporate both selection margins simultaneously. A key insight from our framework is that policies aimed at addressing one margin of selection often involve an economically meaningful trade-off on the other margin in terms of prices, enrollment, and welfare. For example, while a larger penalty for opting to remain uninsured reduces the uninsurance rate, it also tends to lead to unraveling of generous coverage because the newly insured are healthier and sort into less generous plans, driving down the relative prices of those plans. While risk adjustment transfers shift enrollment from lower- to higher-generosity plans, they also sometimes increase the uninsurance rate by raising the prices of less generous plans, which are the entry points into the market. We illustrate these trade-offs in an empirical sufficient statistics approach that is tightly linked to the graphical framework. Using data from Massachusetts, we show that in many policy environments these trade-offs can be empirically meaningful and can cause these policies to have unexpected consequences for overall social welfare.

Health insurers increasingly compete on their networks of medical providers. Using data from Massachusetts’ insurance exchange, I find substantial adverse selection against plans covering the most prestigious and expensive “star” hospitals. I highlight a theoretically distinct selection channel: consumers loyal to star hospitals incur high spending, conditional on their medical state, because they use these hospitals' expensive care. This implies heterogeneity in consumers' incremental costs of gaining access to star hospitals, posing a challenge for standard selection policies. Along with selection on unobserved sickness, I find this creates strong incentives to exclude star hospitals, even with risk adjustment in place.


McIntyre, Adrianna, Mark Shepard, and Myles Wagner. 2021. “Can Automatic Retention Improve Health Insurance Market Outcomes?” American Economic Review, Papers & Proceedings 111: 560-66. Published Version Abstract
There is growing interest in market design using default rules and other "choice architecture” principles to steer consumers toward desirable outcomes. Using data from Massachusetts’ health insurance exchange, we study an “automatic retention” policy intended to prevent coverage interruptions among low-income enrollees. Rather than disenroll people who lapse in paying premiums, the policy automatically switches them to an available free plan until they actively cancel or lose eligibility. We find that automatic retention has a sizable impact, switching 14% of consumers annually and differentially retaining healthy, low-cost individuals. The results illustrate the power of defaults to shape insurance coverage outcomes.
Jaffe, Sonia, and Mark Shepard. 2020. “Price-Linked Subsidies and Imperfect Competition in Health Insurance.” American Economic Journal: Economic Policy 12 (3): 279-311. Published Version Abstract

Policymakers subsidizing health insurance often face uncertainty about future market prices. We study the implications of one policy response: linking subsidies to prices, to target a given post-subsidy premium. We show that these price-linked subsidies weaken competition, raising prices for the government and/or consumers. However, price-linking also ties subsidies to health care cost shocks, which may be desirable. Evaluating this tradeoff empirically using a model estimated with Massachusetts insurance exchange data, we find that price-linking increases prices 1-6%, and much more in less competitive markets. For cost uncertainty reasonable in a mature market, these losses outweigh the benefits of price-linking.

Finkelstein, Amy, Nathaniel Hendren, and Mark Shepard. 2019. “Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts.” American Economic Review 109 (4). Publisher's Version Abstract

How much are low-income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts’ subsidized insurance exchange, we exploit discontinuities in the subsidy schedule to estimate willingness to pay and costs of insurance among low-income adults. As subsidies decline, insurance take-up falls rapidly, dropping about 25% for each $40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower-cost, consistent with adverse selection into insurance. But across the entire distribution we can observe – approximately the bottom 70% of the willingness to pay distribution – enrollee willingness to pay is always less than half of own expected costs. As a result, we estimate that take-up will be highly incomplete even with generous subsidies: if enrollee premiums were 25% of insurers’ average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10% of average costs would still leave at least 20% uninsured. We suggest an important role for uncompensated care for the uninsured in explaining these findings and explore normative implications.

Ho, Kate, Ariel Pakes, and Mark Shepard. 2018. “The Evolution of Health Insurer Costs in Massachusetts, 2010-12.” Review of Industrial Organization 53 (1): 117-137. NBER Working Paper #22835 Abstract

We analyze the evolution of health insurer costs in Massachusetts between 2010-2012, paying particular attention to changes in the composition of enrollees. This was a period in which Health Maintenance Organizations (HMOs) increasingly used physician cost control incentives but Preferred Provider Organizations (PPOs) did not. We show that cost growth and its components cannot be understood without accounting for (i) consumers’ switching between plans, and (ii) differences in cost characteristics between new entrants and those leaving the market. New entrants are markedly less costly than those leaving (and their costs fall after their entering year), so cost growth of continuous enrollees in a plan is significantly higher than average per-member cost growth. Relatively high-cost HMO members switch to PPOs while low-cost PPO members switch to HMOs, so the impact of cost control incentives on HMO costs is likely different from their impact on market-wide insurer costs.


Health Policy Journal Articles

Kong, Edward, Mark Shepard, and Adrianna McIntyre. 2022. “Turnover in Zero-Premium Status Among Health Insurance Marketplace Plans Available to Low-Income Enrollees.” JAMA Health Forum 3 (4): e220674-e220674. Publisher's Version Abstract

Importance  Recent subsidy enhancements in Affordable Care Act (ACA) Marketplaces made many low-income enrolles (below 150% of the federal poverty level [FPL]) eligible for 2 free silver-tier plans. eligible for 2 free silver-tier plans. However, an unintended consequence of this structure is that the identity of which silver plans are free will often “turn over” between years, requiring that enrollees actively initiate premium payment (or lose coverage). The prevalence of this free-plan turnover is not known.

Objective  To measure the prevalence of free-plan turnover in ACA Marketplaces and to estimate how many enrollees below 150% of FPL are likely to be affected.

Design, Setting, and Participants  This observational cross-sectional study used data on plan offerings and premiums in 33 state ACA Marketplaces using in 2021 and 2022, along with estimates of county-level enrollee characteristics and plan selection patterns. The enrollment-weighted share of county markets affected by free-plan turnover was quantified, along with the association of turnover with enrollee and market characteristics. Estimates of the number of affected low-income enrollees were calculated using the data plus statistics reported in past research. Data were analyzed from November 21, 2021, to February 28, 2022.

Results  This study found that turnover of zero-premium plans was quite common, with 93% of counties (weighted by enrollment) experiencing at least 1 zero-premium plan in 2021 turning over to nonfree in 2022; 84% of counties experienced turnover of all $0 silver plans from 2021 to 2022. This turnover affected an estimated 1.36 million people with incomes below 150% of FPL. Turnover was more common in counties with a higher share of non-White enrollees, in Medicaid nonexpansion states, in counties with more carriers, and in counties with changes in the number of offered plans.

Conclusions and Relevance  The findings of this cross-sectional study suggest that owing to the prevalence of zero-premium plan turnover, many low-income ACA enrollees faced elevated risk of disenrollment at the start of 2022. Outreach to affected enrollees and other actions to encourage coverage retention and midyear reenrollment could help mitigate coverage losses.

Baicker, Katherine, Mark Shepard, and Jonathan Skinner. 2013. “Public Financing Of The Medicare Program Will Make Its Uniform Structure Increasingly Costly To Sustain.” Health Affairs 32 (5): 882-890. Abstract

The US Medicare program consumes an ever-rising share of the federal budget. Although this public spending can produce health and social benefits, raising taxes to finance it comes at the cost of slower economic growth. In this article we describe a model incorporating the benefits of public programs and the cost of tax financing. The model implies that the “one-size-fits-all” Medicare program, with everyone covered by the same insurance policy, will be increasingly difficult to sustain. We show that a Medicare program with guaranteed basic benefits and the option to purchase additional coverage could lead to more unequal health spending but slower growth in taxation, greater overall well-being, and more rapid growth of gross domestic product. Our framework highlights the key trade-offs between Medicare spending and economic prosperity.


Book Chapters

Shepard, Mark, Katherine Baicker, and Jonathan Skinner. 2020. “Does One Medicare Fit All? The Economics of Uniform Health Insurance Benefits.” Tax Policy and the Economy. Vol. 34. University of Chicago Press. TPE Volume Abstract
There is increasing interest in expanding Medicare health insurance coverage in the U.S., but it is not clear whether the current program is the right foundation on which to build. Traditional Medicare covers a uniform set of benefits for all income groups and provides more generous access to providers and new treatments than public programs in other developed countries. We develop an economic framework to assess the efficiency and equity tradeoffs involved with reforming this generous, uniform structure. We argue that three major shifts make a uniform design less efficient today than when Medicare began in 1965. First, rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people.  Second, the dramatic expansion of expensive medical technology means that a generous program increasingly crowds out other public programs valued by the poor and middle class.  Finally, as medical spending rises, the tax-financing of the system creates mounting economic costs and increasingly untenable policy constraints. These forces motivate reforms that shift towards a more basic public benefit that individuals can “top-up” with private spending. If combined with an increase in other progressive transfers, such a reform could improve efficiency and reduce public spending while benefiting low income populations.
Layton, Timothy, Ellen Montz, and Mark Shepard. 2018. “Health Plan Payment in U.S. Marketplaces: Regulated Competition with a Weak Mandate.” Risk Adjustment, Risk Sharing and Premium Regulation in Health Insurance Markets. Elsevier. NBER Working Paper Abstract

The U.S. Marketplaces were introduced in 2014 as part of a reform of the U.S. individual health insurance market. While the individual market represents a small slice of the U.S. population, it has historically been the market segment with the lowest rates of take-up and greatest concerns about access to robust coverage. As part of the reform of the individual insurance market, the Marketplaces invoke many of the principles of regulated competition including (partial) community rating of premiums, mandated benefits, and risk adjustment transfers. While the Marketplaces initially appeared to be successful at increasing coverage and limiting premium growth, more recent outcomes have been less favorable and the stability of the Marketplaces is currently in question. In this chapter, we lay out in detail how the Marketplaces adopt the tools of regulated competition. We then discuss ways in which the Marketplace model deviates from the more conventional model and how those deviations may impact the eventual success or failure of these new markets.

Layton, Timothy, Alice Ndikumana, and Mark Shepard. 2018. “Health plan payment in Medicaid Managed Care: A Hybrid Model of Regulated Competition.” Risk Adjustment, Risk Sharing and Premium Regulation in Health Insurance Markets. Elsevier. NBER Working Paper Abstract

Medicaid, the government program for providing health insurance to low-income and disabled Americans, is the largest health insurer in the United States with more than 73 million enrollees. It is also the sector of the US public health insurance system that relies most heavily on the tools of regulated competition with more than 60% of its enrollees enrolled in a private health plan in 2014 (CMS, 2016). However, regulated competition in Medicaid differs from the typical model, emphasizing the tools of competitive procurement, such as competitive bidding, the threat of exclusion from the market, and auto-assignment of enrollees to plans, to attempt to induce efficiency instead of relying primarily on the forces of consumer demand. In this chapter we discuss how Medicaid combines the tools of competitive procurement with the tools of regulated competition and some potential consequences of this hybrid model.


Older Papers

Life cycle theory predicts that individuals facing uncertain mortality will annuitize all or most of their retirement wealth. Researchers seeking to explain why retirees rarely purchase annuities have focused on imperfections in commercial annuities – including actuarially unfair pricing, lack of bequest protection, and illiquidity in the case of risky events like medical shocks. I study the annuity choice implicit in the timing of Social Security claiming and show that none of these can explain why most retirees claim benefits as early as possible, effectively choosing the minimum annuity. Most early claimers in the Health and Retirement Study had sufficient liquidity to delay Social Security longer than they actually did and could have increased lifetime consumption by delaying. Because the marginal annuity obtained through delay is better than actuarially fair, standard bequest motives cannot explain the puzzle. Nor can the risk of out-of-pocket nursing home costs, since these are concentrated at older ages past the break-even point for delayed claiming. Social Security claiming patterns, therefore, add to the evidence that behavioral explanations may be needed to explain the annuity puzzle.