Individuals face switching frictions in many products, and insurance exchanges are no exception. In a paper published in the American Economic Journal: Economic Policy, I show that initial defaults have lasting effects in the Medicare Part D prescription drug insurance exchange. Since firms cannot commit to future prices, they should respond to inertia by raising prices on existing enrollees, while introducing cheaper alternative plans. I show that the market displays this pattern: older plans in this market are about 10% more expensive than comparable newly introduced plans.
Review of Economics and Statistics, 2015. (joint with Amanda Starc). Also see NBER Working Paper 18089.
Insurance markets often contain pricing regulation, such as community rating. I examine how pricing regulation interacts with imperfect competition.
When markets are imperfectly competitive, these regulations link prices for consumers that differ not only in costs, but also in preferences. Tightening community rating regulation doesn’t merely move the price toward the average cost, since firms price to the marginal enrollee. As a result, community rating regulation can affect firm profits and market efficiency. We look at the Massachusetts Health Insurance Exchange (HIX), and show that younger individuals are much more price sensitive than older individuals. Thus, insurers should charge higher markups on older individuals. Tighter community rating restrictions transfer money from younger consumers to older consumers, but also from firm profits to consumer surplus.
Under the Affordable Care Act, people must buy health insurance or pay a financial penalty. Framing that policy as a mandate to buy health insurance versus as a tax on not purchasing health insurance can matter.
In Ericson and Kessler (JEBO 2016), we describe the results of a year-long experiment in which a series of participants reported their probability of purchasing health insurance either under a mandate or a financially equivalent tax.
In late 2011 and early 2012, articulating the policy as a mandate, rather than a financially equivalent tax, increased probability of insurance purchase by 10.6 percentage points — an effect comparable to a $1000 decrease in annual premiums. However, the controversy over the Affordable Care Act’s insurance mandate provision that changed the political discourse during the year 2012. We document the rise of this controversy. After the controversy, the mandate is no more effective than the tax.
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