Equilibria in Health Exchanges: Adverse Selection vs. Reclassification Risk

Benjamin R. Handel, Igal Hendel and Michael Whinston

No 19399, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies regulated health insurance markets known as exchanges, motivated by their inclusion in the Affordable Care Act (ACA). We use detailed health plan choice and utilization data to model individual-level projected health risk and risk preferences. We combine the estimated joint distribution of risk and risk preferences with a model of competitive insurance markets to predict outcomes under different regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find that market unravelling from adverse selection is substantial under the proposed pricing rules in the Affordable Care Act (ACA), implying limited coverage for individuals beyond the lowest coverage (Bronze) health plan permitted. Although adverse selection can be attenuated by allowing (partial) pricing of health status, our estimated risk preferences imply that this would create a welfare loss from reclassification risk that is substantially larger than the gains from increasing within-year coverage, provided that consumers can borrow when young to smooth consumption or that age-based pricing is allowed. We extend the analysis to investigate some related issues, including (i) age-based pricing regulation (ii) exchange participation if the individual mandate is unenforceable and (iii) insurer risk-adjustment transfers.

JEL-codes: D82 G22 I11 I13 I18 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-com, nep-cta, nep-hea and nep-reg
Note: EH IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Published as Equilibria in Health Exchanges: Adverse Selection vs. Reclassification Risk Econometrica 83(4), 2015, 1261-1313 (lead article) (joint with Igal Hendel and Michael Whinston)

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