The Welfare Effects of Long-Term Health Insurance Contracts

Benjamin R. Handel, Igal Hendel and Michael Whinston

No 23624, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Reclassification risk is a major concern in health insurance. We use a rich dataset with individual-level information on health risk to empirically study one possible solution: dynamic contracts. Empirically, dynamic contracts with one-sided commitment substantially reduce the reclassification risk present with spot contracting, achieving close to the first-best for consumers with flat net income paths. Gains are smaller for consumers with net income growth, and these consumers prefer ACA-like community rating over dynamic contracts. However, lower risk aversion, sufficient switching costs, or government insurance of pre-age-25 health risks can raise welfare with dynamic contracts above the level in ACA-like markets.

JEL-codes: G22 I13 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-hea and nep-ias
Note: EH IO PE
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