The Effects of Risk Standardization on Private Health Insurance Supply: Evidence from Chile

• In Event: Student Panel: Insurance and Poverty Alleviation

Abstract

Competition in health insurance markets can offer benefits to consumers. However, in many countries, governments regulate these markets to address equity concerns. In 2020, in response to public demands for gender equality in healthcare, the Chilean government prohibited gender-based pricing and standardized risk age-groups for new private health contracts, imposing restrictions on insurers’ premium-setting practices. This paper examines the supply response to this regulation using a regression discontinuity in time design and monthly administrative data of the universe of private health plans in Chile from 2017-2022. The analysis reveals a shift in market equilibrium consistent with the self-selection mechanism outlined in Rothschild and Stiglitz (1976): on average, premiums increased, and inpatient coverage decreased. In addition, I explore the response in the probability of fixed copayment, annual cap, and healthcare network. I observe a rise in the integration of healthcare service provision, likely aimed at reducing medical costs as discussed in Arrow (1963). Overall, the new pool of health plans shows lower quality, reinforcing the notion that insurers adapt by differentiating contracts to induce individuals to make decisions that reveal their individual risk. Moreover, there is evidence of a migration of policyholders to the public healthcare system. I estimate this unintended consequence implies a small .5–1.2% increase in government spending on public health. These findings highlight the importance of supply-side dynamics in the implementation of public policies in health insurance markets, their implications for insurance quality, and the need for contract restrictions to mitigate the distortionary effects of insurers’ strategies.

Author

• Kathya Tapia, University of California, Davis
  Presenting Author