Health Plan Quality and the Lock-In Effect of Chronic Illness
The persistence of low-quality insurers in health care markets poses significant challenges for public policy, often resulting in regulatory intervention and costly terminations. This paper investigates a potential mechanism contributing to this phenomenon: increased consumer inertia following health shocks. Using rich administrative data from Colombia’s Régimen Contributivo, a mandatory health insurance program covering half the country’s population, I examine how cancer diagnoses affect consumer switching behavior. The program’s design—featuring a single standardized plan offered by competing insurers, mandatory enrollment, and virtually unrestricted monthly switching—provides an ideal setting to study consumer inertia. Employing a difference-in-differences approach, I find that cancer diagnoses cause a substantial and persistent “lock-in” effect, decreasing the probability of switching insurers by 34%. This effect varies across insurers, with reductions in switching rates ranging from 20% to 70%. Notably, even low-performing insurers that were eventually terminated by regulators exhibit significant lock-in effects. Furthermore, I document substantial heterogeneity among insurers in cancer treatment intensity and mortality rates, indicating that many locked-in consumers forgo significant value by remaining with lower-quality insurers. I Link to paper.