Risk selection through hospital networks:

In this paper identify a new risk selection mechanism in health insurance markets: hospital coverage at the service level. Using a model of health insurer demand, average costs per enrollee, and competition among insurers, I measure the impact of risk adjustment and risk premiums on the level of coverage across hospital networks, risk sharing, and total health costs. My empirical context is the Colombian health market, where every aspect of the mandatory health plan is regulated by the government, with the exception of hospital networks. My results show that health insurers risk select by reducing their hospital coverage for services that relatively more expensive patients tend to claim. Eliminating current risk adjustment results in narrow hospital networks and poorer quality of service delivery. Incorporating diagnostics into the risk adjustment formula results in broader hospital networks and increases consumer welfare by about 20%.