CORPORATE MORAL HAZARD IN U.S. HEALTH INSURANCE: CHURN AND DENIAL RATES

Abstract

BACKGROUND: Health insurance churn is common in the U.S. People move in and out of coverage as jobs, incomes, and eligibility change. I treat churn as a feature of, not an exception in, a multi-payer system. These transitions disrupt access, cause incentive misalignment, and may shift costs between payers. I test whether commercial payers, anticipating disenrollment, tighten adjudication in ways consistent with what I define in this context as corporate moral hazard. If so, denial rates should rise just before the switch to Medicare.

QUESTIONS: I attempt to determine whether claim denial rates increase around the Medicare eligibility cliff in a manner consistent with corporate moral hazard by commercial insurers. 1) Around the predictable transition from commercial coverage to Medicare at age 65, do commercial insurers exhibit higher claim denial rates in the years preceding eligibility? 2) If commercial denial rates rise before age 65, are payer strategies a potential driver for this change?

METHODS: I develop a conceptual framework that redefines moral hazard in the context of US health insurance as cost containment strategies employed by commercial payers. I start by mapping fiscal flows. Who pays whom, for what, and on what risk terms? From this, I develop a taxonomy of health insurance products based on fiscal model (e.g., fee-for-service, capitation, shadow contracts). The taxonomy helps me illustrate that many kinds of coverage transitions occur, and that incentives differ by financial archetype. I then focus on the most predictable transition, which is commercial coverage to Medicare at age 65. I utilize the New Hampshire All-Payer Claims Database (2018–2023) to examine denial patterns surrounding this transition. I standardize my data-parsing framework as reproducible code, the Delayed Services Algorithm (DSA), which constitutes the study’s core methodological contribution. Since data cost and access constraints limited my work to a single state, the DSA is a transferable methodological resource for researchers exploring similar behaviors in other contexts. I also identify services that are more frequently denied and categorize them into meaningful groups using the New York State 3M Ambulatory Patient Group (APG) system. I conduct interviews with clinicians, medical billing experts, vendors, and payer staff to explain the quantitative trends and identify cost containment mechanisms used by commercial payers and how they may present around insurance transitions.

FINDINGS: After controlling for patient and clinician fixed effects, there were statistically significant increases in denial rates, with rates rising by 2.1 % points at age 60 and then decreasing by approximately 8.6 % points after the Medicare transition. The increase in denial rates was most prominent in categories such as laboratory-based testing, durable medical equipment, musculoskel-etal, and gastrointestinal procedures. Payer-side and non-payer-side respondents explained denial variation through different mechanisms. Payer leaders admitted to average enrollment spans impacting claim adjudication for high-cost claims.