Non-Price Competition and Risk Selection Through Hospital Networks

Insurer competition in hospital networks generates incentives for risk selection. I model this type of competition between insurers to understand the effect of risk adjustment and premium setting on hospital network breadth and consumer welfare. I use data from Colombia’s health care system to estimate the model. Every aspect of the Colombian national insurance plan is regulated by the government except for hospital networks, which insurers can choose separately for different services. I find that insurers risk-select by providing narrow networks in services that unprofitable patients demand the most. Eliminating risk adjustment reduces average network breadth by 6.7% and consumer welfare by 2.2%. Improving the risk adjustment formula increases average network breadth by 4.6%-28.0% and consumer welfare by 2.9%-8.0%, depending on how many risk factors are included. Price and non-price competition are substitutes for risk selection as a zero-premium policy exacerbates underprovision of insurance coverage. Results highlight hospital networks as an important dimension of non-price competition and cream-skimming in health care markets.