Working Papers

Working Paper
Kreider, Amanda, Timothy Layton, Mark Shepard, and Jacob Wallace. Working Paper. “Adverse Selection and Network Design Under Regulated Plan Prices: Evidence from Medicaid”. NBER WP #30719 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
Draft (PDF)
Revise & Resubmit, Journal of Health Economics
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 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). Moment inequalities are used to infer state dependence from consumers' switching choices in response to changes in product attributes. We infer much smaller switching costs on the health insurance exchange than is inferred from standard logit and/or random effects methods. A counterfactual policy evaluation  illustrates that the policy implications of this difference can be substantive.
Draft (PDF)
Are application hassles, or “ordeals,” an effective way to limit public program enrollment? We provide new evidence by studying (removal of) an auto-enrollment policy for health insurance, adding an extra step to enroll. This minor ordeal has a major impact, reducing enrollment by 33% and differentially excluding young, healthy, and economically disadvantaged people. Using a simple model, we show that adverse selection – a classic feature of insurance markets – undermines ordeals' standard rationale of excluding low-value individuals, since they are also low-cost and may not be inefficient. Our analysis illustrates why ordeals targeting is unlikely to work well in selection markets.
Draft (PDF) Summary and Policy Brief (PDF) Slides (PPT)

Revise & Resubmit, American Economic Review
(Previously circulated as "Reducing Ordeals through Automatic Enrollment")
Coverage: HKS Insights

Journal Article
Layton, Timothy, Edward Kong, and Mark Shepard. Working Paper. “Adverse Selection and (un)Natural Monopoly in Insurance Markets”. Abstract
Adverse selection is a classic market failure known to limit or “unravel” trade in insurance  markets and many other settings. We show that even when subsidies or mandates ensure trade, adverse selection also tends to unravel competition among differentiated firms — leading to fewer surviving competitors and in the extreme, what we call "un-natural monopoly." Like fixed costs in standard natural monopoly, adverse selection creates a wedge between marginal and average costs, as firms compete aggressively on price to attract (or "cherry-pick") price-sensitive low-risk consumers. This wedge must be covered by sufficiently large markups, which limits how many firms can profitably survive. Unlike fixed costs, the underlying problem is a coordination failure that can be addressed via (careful) price regulation — a policy often used in practice but which existing models have difficulty motivating. We show the empirical relevance of strong adverse selection on price using subsidy-driven price variation and a structural model of competition in Massachusetts’ health insurance exchange. Our analysis suggests a new rationale for policies mitigating adverse selection: Without them, the market devolves to monopoly; with them, the market can sustain robust insurer competition.
Paper Draft (PDF)
Work in progress - Comments welcome!