Welfare costs of reclassification risk in the health insurance market

Svetlana Pashchenko and Ponpoje Porapakkarm

Journal of Macroeconomics, 2015, vol. 45, issue C, 21-44

Abstract: We assess the quantitative importance of reclassification risk in the US health insurance market. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. Thus, a change in the health status can lead to a significant change in the health insurance premium. We measure welfare gains from introducing explicit insurance against this risk in the form of guaranteed renewable health insurance contracts. We find that in the current institutional environment individuals are well-sheltered against reclassification risk and they only moderately gain from having access to these contracts. More specifically, we show that employer-sponsored health insurance and public means-tested transfers play an important role in providing implicit insurance against reclassification risk. If these institutions are removed, the average welfare gains from having access to guaranteed renewable contracts exceed 4% of the annual consumption.

Keywords: Health insurance; Reclassification risk; Dynamic insurance; Guaranteed renewable contracts; General equilibrium (search for similar items in EconPapers)
JEL-codes: D52 D58 D91 G22 I11 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Welfare costs of reclassification risk in the health insurance market (2011)
Working Paper: Welfare costs of reclassification risk in the health insurance market (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:45:y:2015:i:c:p:21-44

DOI: 10.1016/j.jmacro.2015.04.003

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