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Selection in Health Insurance Markets and Its Policy Remedies

Michael Geruso and Timothy Layton ()

No 23876, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this essay, we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates. We begin by outlining some important but often misunderstood differences between two types of conceptual frameworks related to selection. The first, which we call the fixed contracts approach, takes insurance contract provisions as given and views selection as influencing only insurance prices in equilibrium. The second, the endogenous contracts approach, treats selection as also influencing the design of the contract itself, including the overall level of coverage and coverage for services that are differentially demanded by sicker consumers. After outlining the selection problems, we discuss four commonly employed policy instruments that affect the extent and impact of selection: 1) premium rating regulation, including community rating; 2) consumer subsidies or penalties to influence the take-up of insurance; 3) risk adjustment; and 4) contract regulation. We discuss these policies with reference to two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage and the individual insurance markets reformed by the Affordable Care Act of 2010.

JEL-codes: H22 H4 I1 I13 I18 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-cta, nep-hea, nep-ias and nep-pbe
Note: AG HC PE
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Published as Michael Geruso & Timothy J. Layton, 2017. "Selection in Health Insurance Markets and Its Policy Remedies," Journal of Economic Perspectives, vol 31(4), pages 23-50.

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