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How do insurance firms respond to financial risk sharing regulations? Evidence from the Affordable Care Act

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  • Daniel W. Sacks
  • Khoa Vu
  • Tsan‐Yao Huang
  • Pinar Karaca‐Mandic
Abstract
Many insurance markets have reinstated premium stabilization programs to ensure financial protection from market volatility. In this paper, we focus on one such regulation—risk corridors (RCs)—in the context of the Health Insurance Marketplaces established under the Affordable Care Act. We develop a model to show how the program provided incentives for some insurers to lower their premiums. The RCs program was defunded unexpectedly for coverage year 2016, before its legislated end in 2016. Consistent with the model, we find that making a RCs claim before the program ended is associated with higher premium growth after the program's demise. The model and empirical evidence are consistent with the view that the end of the RCs program contributed to premium growth in the Marketplaces.

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  • Daniel W. Sacks & Khoa Vu & Tsan‐Yao Huang & Pinar Karaca‐Mandic, 2021. "How do insurance firms respond to financial risk sharing regulations? Evidence from the Affordable Care Act," Health Economics, John Wiley & Sons, Ltd., vol. 30(6), pages 1443-1460, June.
    • Handle: RePEc:wly:hlthec:v:30:y:2021:i:6:p:1443-1460
    DOI: 10.1002/hec.4252
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    References listed on IDEAS

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    Cited by:

    1. Benjamin R. Handel & Jonathan T. Kolstad, 2021. "The Affordable Care Act After a Decade: Industrial Organization of the Insurance Exchanges," NBER Working Papers 29178, National Bureau of Economic Research, Inc.
    2. Fossen, Frank M. & Hossain, Mobarak & Mukhopadhyay, Sankar & Toth, Peter, 2021. "The Cost of Health Insurance and Entry into Entrepreneurship," IZA Discussion Papers 14891, Institute of Labor Economics (IZA).

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