Non-Price Competition and Risk Selection Through Hospital Networks:

Health insurers can engage in risk selection through the design of their hospital networks. I measure the impact of risk selection incentives on hospital network breadth using a model of insurer competition in networks applied to data from Colombia’s health care system. 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 require. 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. Simulations of the model with deregulated premiums show that price and non-price competition are substitutes for risk selection as a zero-premium policy can generate narrow networks. The results provide new evidence on hospital networks as a dimension of non-price competition and cream-skimming in health care markets.