Adverse selection and network design under regulated plan prices: Evidence from Medicaid

Area of Science:

• Health economics
• Public health policy
• Insurance market dynamics

Background:

• Health plans for the poor frequently restrict access to specialized medical facilities.
• Adverse selection is a key factor influencing the structure of private health plans within the Medicaid program.

Purpose of the Study:

• To investigate the role of adverse selection in the limited access to specialty hospitals among private Medicaid plans.
• To analyze the impact of network changes, specifically the inclusion of a top cancer hospital, on plan enrollment and profitability.

Main Methods:

• Analysis of a natural experiment involving a network change in health plans.
• Examination of enrollment data to quantify the impact of covering a high-demand specialty hospital on different patient groups.

Main Results:

• Covering a top cancer hospital led to a 50% increase in demand among enrollees with cancer, indicating severe adverse selection.
• No significant impact on demand was observed among enrollees without cancer.
• Fixed insurer payments in Medicaid complicate efforts to counteract adverse selection and induced contract distortions.

Conclusions:

• Medicaid's payment structure presents challenges in managing adverse selection, requiring either unsustainable payment rates or highly accurate risk adjustment.
• A modest, explicit bonus payment for covering high-demand specialty hospitals can effectively mitigate adverse selection and ensure profitable coverage.