Optimal Long-Term Health Insurance Contracts: Characterization, Computation, and Welfare Effects

Soheil Ghili (), Ben Handel, Igal Hendel and Michael D. Whinston
Additional contact information
Soheil Ghili: Cowles Foundation, Yale University, https://som.yale.edu/faculty/soheil-ghili
Ben Handel: Department of Economics, UC Berkeley
Igal Hendel: Department of Economics, Northwestern University
Michael D. Whinston: Department of Economics and Sloan School of Management, M.I.T

No 2218R2, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Reclassification risk is a major concern in health insurance where contracts are typically one year in length but health shocks often persist for much longer. While most health systems with private insurers emphasize short-run contracts paired with substantial pricing regulations to reduce reclassification risk, long-term contracts with one-sided insurer commitment have significant potential to reduce reclassification risk without the negative side effects of price regulation, such as adverse selection. In this paper, we theoretically characterize optimal long-term insurance contracts with one-sided commitment, extending prior models of this form in several key directions that are important for studying health insurance markets. We leverage this characterization to provide a simple algorithm for computing optimal contracts from primitives. We estimate key market fundamentals using data on all under-65 privately insured consumers in Utah and pair these estimates with our model to study comparative statics related to contract design and welfare. We find that the welfare value of a system that effectively implements these long-term contracts depends crucially on (i) the degree of public insurance pre-system health risk (ii) the distribution of expected lifetime income gradients in the population (iii) the stochastic process governing life-cycle health shocks (iv) the extent of consumer switching costs and (v) the degree of consumer myopia.

JEL-codes: D0 I1 L5 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2019-12, Revised 2021-05
New Economics Papers: this item is included in nep-ias
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Citations: View citations in EconPapers (3)

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