Microeconomics

Health insurance

Artificial intelligence

Health care

Economics

Reinsurance

Selection (genetic algorithm)

Economic growth

Formulary

Business

Medical prescription

Moral hazard

Auto insurance risk selection

Prescription drug

Computer science

Incentive

Actuarial science

Casualty insurance

Adverse selection

Pharmacology

Insurance policy

Medicine

American Economic Journal Economic Policy

We study insurers’ use of prescription drug formularies to screen consumers in the ACA Health Insurance exchanges. We begin by showing that exchange risk adjustment and reinsurance succeed in neutralizing selection incentives for most, but not all, consumer types. A minority of consumers, identifiable by demand for particular classes of prescription drugs, are predictably unprofitable. We then show that contract features relating to these drugs are distorted in a manner consistent with multidimensional screening. The empirical findings support a long theoretical literature examining how insurance contracts offered in equilibrium can fail to optimally trade off risk protection and moral hazard. (JEL D82, G22, H51, I13, I18)

Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges