Becker Friedman Institute

Research Repository

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

The Evolution of Health Insurer Costs in Massachusetts, 2010-12

We analyze the evolution of health insurer costs in Massachusetts between 2010-2012, paying particular attention to changes in the composition of enrollees. This was a period in which Health Maintenance Organizations (HMOs) increasingly used physician cost control incentives but Preferred Provider Organizations (PPOs) did not. We show that cost growth and its components cannot be understood without accounting for (i) consumers’ switching between plans, and (ii) differences in cost characteristics between new entrants and those leaving the market. New entrants are markedly less costly than those leaving (and their costs fall after their entering year), so cost growth of continuous enrollees in a plan is significantly higher than average per-member cost growth. Relatively high-cost HMO members switch to PPOs while low-cost PPO members switch to HMOs, so the impact of cost control incentives on HMO costs is likely different from their impact on market-wide insurer costs.

Authors: 
Kate Ho, Columbia University
Ariel Pakes, Harvard University
Mark Shepard, Harvard University
Publication Date: 
February, 2017
Keywords: 
Publication Status: 
Document Number: 
2017-010
File Description: 
First version, January 3, 2017