Ryan B. Conor
Department of Economics
University of Minnesota
Competitive markets with adverse selection lead to inefficient allocations. This is primarily because average costs, and as a result competitive zero-profit prices, can be substantially greater than marginal cost. A monopolist does not suffer from this source of inefficiency—it internalizes the same marginal cost as a social planner—but creates inefficient allocations by charging a markup. In this seminar, I explore the trade-offs between these two sources of inefficiency and their interaction with policies commonly used to mitigate adverse selection. I use novel choice data from the non-group health insurance market and the HHS-HCC risk prediction model to estimate the joint distribution between preferences and cost and use these estimates to simulate the equilibrium effects of market structure. I show that under certain policy regimes, more concentrated markets can improve allocations for consumers with a high cost to serve and high willingness-to-pay. I also demonstrate how two policies—the individual mandate penalty and risk adjustment—are ineffective in concentrated markets. In the case of the individual mandate, I find that it leads to higher premiums in the most concentrated markets, the opposite of the intended effect.
HPM Seminar Series is sponsored by the Division of Health Policy & Management, School of Public Health.