We study insurers' use of prescription drug formularies to screen consumers in the ACA Health Insurance exchanges. We begin by showing that exchange risk adjustment and reinsurance succeed in neutralizing selection incentives for most, but not all, consumer types. A minority of consumers, identifiable by demand for particular classes of prescription drugs, are predictably unprofitable. We then show that contract features relating to these drugs are distorted in a manner consistent with multidimensional screening. The empirical findings support a long theoretical literature examining how insurance contracts offered in equilibrium can fail to optimally trade off risk protection and moral hazard.
Geruso, Michael, Timothy Layton, and Daniel Prinz.
"Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges."
American Economic Journal: Economic Policy,
Asymmetric and Private Information; Mechanism Design
Insurance; Insurance Companies; Actuarial Studies
National Government Expenditures and Health
Health Insurance, Public and Private
Health: Government Policy; Regulation; Public Health