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This paper shows that health insurers’ decisions to include providers in their networks
are influenced by a previously underappreciated source of cost savings: network administrative
costs. These costs counteract insurers’ incentives to offer narrow networks,
which in standard models arise from risk selection and negotiated prices. Using a structural
model of insurer competition over network breadth applied to Colombia, I find
that insurers engage in risk selection by excluding providers in services used by unprofitable
patients, but that heterogeneity in administrative costs leads some insurers
to offer broader networks. Results inform the design of risk adjustment and network
adequacy policies.
