Seminario CEDE - Paul Andrés Rodríguez Lesmes

Terminations of health plans are common in managed care systems around the world. This paper examines how to reassign consumers to incumbent insurers after such terminations. We propose an equilibrium model of competition in which insurers can respond to the reassignment rules through their provider networks. The setting is Colombia where the largest health insurer was terminated by the government in December 2015 and where insurers compete mainly on provider network breadth. We find that random reassignment outperforms other reassignment rules in terms of consumer welfare, health care spending, and provider network breadth because it reduces market power. However, this policy is ineffective in reducing adverse selection due to slight increases in switching rates.