Health Research and Policy

Research in Progress Seminar (RIP)

Date: February 5, 2014
Time: 4:00 - 5:00 pm
Location: CHP/PCOR Conference Room
117 Encina Commons
Speaker: Maria Polyakova, PhD in Economics, MIT
Title: Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D


I take advantage of the evolution of the regulatory and pricing environment in the first years of a large federal prescription drug insurance program for seniors - Medicare Part D - to empirically explore interactions among adverse selection, switching costs, and regulation. Using detailed administrative data, I document evidence of both adverse selection of beneficiaries across contracts and switching costs for beneficiaries in changing contracts within Medicare Part D. Motivated by this descriptive evidence, I formulate an empirical model of contract choice that allows for both switching costs and private information about expected risk. Using this model, I show that switching costs are large and have quantitatively important implications for the sorting of individuals among contracts. How switching costs affect selection over time depends on the direction of changes in the contract space relative to the initial conditions. I find that in the present environment, on net, switching costs help sustain an adversely-selected equilibrium with large differences in risks between more and less generous contracts. I then simulate how switching costs could affect regulatory interventions that change the generosity of contracts. For example, I consider the tightening of the minimum standard requirement by “filling” the Part D donut hole as implemented under the Affordable Care Act. I find that absent any switching costs, this regulation would have eliminated the differences in risks across contracts; however, in the presence of the switching costs that I estimate, the effect of the policy is largely muted.

Please note: All research in progress seminars are off-the-record. Any information about methodology/press release and/or results are embargoed until publication.
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