The costs of lock-in in health care markets: evidence from hospital choice in Uruguay

Health care markets usually generate consumer lock-in because consumers have to stay with the same provider between open enrollment periods. This lock-in generates costs for the consumers but potential benefits in total welfare, since it reduces the extent of adverse selection. This paper seeks to quantify the cost of consumer lock-in using administrative records for Uruguay. The Uruguayan health care system has three features that provide a good setting to identify these costs. First, since 2007 a public health insurance policy (FONASA) has been established, which covers the monthly fee to receive health care at the particular hospital that the consumer chooses. Second, under the program, the mobility of consumers across hospitals is strictly regulated. Even when hospitals change characteristics and price and the consumers may want to reoptimize their option based on these changes, they have to stay in the same hospital for at least three years before they are able to choose a new hospital in a yearly open enrollment period. Finally, contrary to what happens in many countries (notably the US), the setting for the problem is relatively clean: consumers receive all their health care from the hospital they have chosen without the intermediation of insurance companies and there are only a limited number of hospitals. These features allow me to develop a dynamic discrete choice model of demand for differentiated products. I estimate the model through a nested fixed-point algorithm using administrative records on hospital characteristics, posted out-of-pocket prices, and consumer individual choices for hospitals between 2009 and 2013. The estimates point out the importance of the switching cost, which represents 40% of the average health care expenditure per year in Uruguay. Counterfactual exercises are used to determine the cost of the dynamic lock-in for the consumers based on consumer welfare computations. I find that although consumer welfare increases from lock-in reductions, large gains are only obtained when lock-in reductions are combined with reductions in switching costs.