Biography
Timothy Layton, PhD, is an associate professor in the Department of Health Care Policy at Harvard Medical School, a Research Associate at the National Bureau of Economic Research, and an affiliated researcher at J-PAL at MIT. His research focuses on the economics of health insurance markets, with a particular focus on markets and social health insurance programs for low-income households.
Dr. Layton and his collaborators are using economic models of health insurer behavior to design payment systems that combat inefficiencies caused by adverse selection. His work also focuses on problems with existing payment systems and whether the risk adjustment system in the state and federal Health Insurance Marketplaces adequately discourages insurers from discriminating against sick consumers whose treatment includes expensive prescription drugs. In other work, Dr. Layton also studies consumer choice in the state and federal Marketplaces.
Dr. Layton is the recipient of the 2014 Mark A. Satterthwaite Award for Outstanding Research in Healthcare Markets from the Kellogg School of Management at Northwestern University. He has been quoted or cited in The New York Times, The Washington Post, Bloomberg Business, NPR, Modern Healthcare, Politico, and the AcademyHealth blog.
Student Lecture: 28 September 2023
Economics of Health Insurance
Faculty Seminar: 29 September 2023
Adverse Selection and (un)Natural Monopoly in Insurance Markets
Adverse selection is a classic market failure known to limit or “unravel" trade in insurance
markets and many other settings. We show that even when subsidies or mandates ensure trade, adverse selection also tends to unravel competition among differentiated firms -- leading to fewer surviving competitors and in the extreme, what we call “un-natural monopoly." Like fixed costs in standard natural monopoly, adverse selection creates a wedge between marginal and average costs, as firms compete aggressively on price to attract (or \cherry-pick") price-sensitive low-risk consumers. This wedge must be covered by sufficiently large markups, which limits how many firms can profitably survive. Unlike fixed costs, the underlying problem is a coordination failure that can be addressed via (careful) price regulation -- a policy often used in practice but which existing models have difficulty motivating. We show the empirical relevance of strong adverse selection on price using subsidy-driven price variation and a structural model of competition in
Massachusetts' health insurance exchange. Our analysis suggests a new rationale for policies mitigating adverse selection: Without them, the market devolves to monopoly; with them, the market can sustain robust insurer competition.