Valentina Reig

Retention by Design: Long-term Contracts in Health Insurance

This paper studies how regulation designed to protect consumers from rising premiums as their health worsens shapes competition and welfare when insurers have market power. In Chile, insurers commit to long-term premium schedules, while consumers remain free to switch plans. Using administrative data on enrollment, insurance plans, and medical claims, we document that healthier individuals are more likely to switch plans. Leveraging demographic differences across groups of similar plans, we find that newly introduced plans help insurers retain switchers. To quantify how consumer switching and insurers' retention strategies jointly affect prices and welfare, we develop and estimate a supply and demand model in which insurers set prices once, anticipating future enrollment, costs, and plan introductions. In counterfactuals, we find that banning new plan introductions reduces insurers' costs but raises premiums by 13%, causing more enrollees to move from private to public insurance. Banning consumer switching also reduces costs but lowers consumer welfare, as individuals lose the flexibility to adjust coverage when their health needs change. Our findings show that policies can reduce insurers' costs without making consumers better off.