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Sick and locked-in: a study on health status and consumer inertia in health insurance

Fajardo Ramírez, Andrés Felipe (2025) Sick and locked-in: a study on health status and consumer inertia in health insurance. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004896

Abstract

Recent evidence documents substantial quality differences across health plans within highly regulated insurance programs, raising the question of what prevents consumers from switching to better options. This thesis provides novel evidence of a key barrier: health risk driving consumer inertia. Using detailed administrative data from Colombia’s Regimen Contributivo, a mandated insurance program covering over 20 million ´ enrollees, it examines how health risk affects switching behavior when plans offer identical contracts but provide different effective access to medical care in practice. The setting is ideal for studying the relationship between health risk and inertia as it features standardized contracts with virtually unrestricted switching yet exhibits substantial quality differences, particularly during the collapse of two large insurers covering 30% of individuals in urban markets. The study focuses on mean care provision—the amount of medical care plans provide to enrollees with similar needs—and documents substantial heterogeneity across plans in this important dimension of plan quality. Three complementary approaches establish that health risk increases choice persistence. First, a predictive risk score based on diagnostic and demographic data shows higher ex-ante risk correlates with lower switching rates. Second, an event-study design exploiting cancer diagnoses reveals that illness causally reduces switching rates by up to 63%. Third, a structural demand model shows both age and health risk increase switching costs, with the highest-risk individuals exhibiting near-complete inertia. Unlike standard adverse selection theory, where high-risk individuals seek better coverage, this study uncovers a different phenomenon: high-risk individuals remain in deteriorating plans even when alternatives offer better effective coverage. This creates a death spiral where healthier enrollees exit first, leaving behind a riskier pool that becomes increasingly unprofitable under the program’s coarse risk adjustment, highlighting critical flaws in risk-adjustment mechanisms with important implications for managed competition in health insurance markets.

Item Type: Thesis (PhD)
Additional Information: © 2025 Andrés Felipe Fajardo Ramírez
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
R Medicine > RA Public aspects of medicine
Sets: Departments > Economics
Supervisor: Spinnewijn, Johannes
URI: http://etheses.lse.ac.uk/id/eprint/4896

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