The Expansionary and Contractionary Supply-Side Effects of Health Insurance

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We examine how health insurance expansions affect the entry and location decisions of health care providers. We first show theoretically that expansions of health insurance with relatively high, market-based prices (e.g., private insurance) should lead the supply side to expand, whereas expansions of insurance with low, administered prices (e.g., Medicaid coverage) can instead lead the supply side to contract. We test these predictions in the setting of retail clinics, where we exploit county-level changes in insurance coverage following the Affordable Care Act and 1,721 retail clinic entries and exits. Using two-way fixed effects and instrumental variable designs, we find that growth in private insurance leads to large growth in clinic entry, whereas clinic penetration is dampened by increases in Medicaid coverage. Further consistent with our theoretical model, the contrasting supply-side effects of private insurance and Medicaid expansions are concentrated in states with low provider reimbursements under Medicaid. While it has long been accepted that reductions in the prices paid by consumers following insurance expansions should lead the supply side to expand to meet increased demand (Arrow, 1963), our results demonstrate that whether health insurance expansions cause the supply side to expand or contract further depends on how the prices received by providers are affected.