Welfare costs of reclassification risk in the health insurance market

Svetlana Pashchenko and Ponpoje Porapakkarm

MPRA Paper from University Library of Munich, Germany

Abstract: One of the major problems of the U.S. health insurance market is that it leaves individuals exposed to reclassification risk. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. A change in the health status can lead to a significant change in the health insurance premium. We study how costly this reclassification risk is for the welfare of consumers. More specifically, we use a general equilibrium model to quantify the implications of introducing guaranteed renewable contracts into the economy calibrated to replicate the key features of the health insurance system in the U.S. Guaranteed renewable contracts are private insurance contracts that can provide protection against reclassification risk even in the absence of consumer commitment or government intervention. We find that though guaranteed renewable contracts provide a good insurance against reclassification risk, the welfare effects from introducing this type of contracts are small. In other words, the presence of reclassification risk does not impose large welfare losses on consumers. This happens because some institutional features in the current U.S. system substitute for the missing explicit contracts that insure reclassification risk. In particular, a good protection against reclassification risk is provided through employer-sponsored health insurance and government means-tested transfers.

Keywords: health insurance; reclassification risk; dynamic insurance; guaranteed renewable contracts; general equilibrium (search for similar items in EconPapers)
JEL-codes: D52 D58 D60 D91 G22 I11 (search for similar items in EconPapers)
Date: 2011-10-19
New Economics Papers: this item is included in nep-cis, nep-dge, nep-hea and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/48013/1/MPRA_paper_48013.pdf revised version (application/pdf)

Related works:
Journal Article: Welfare costs of reclassification risk in the health insurance market (2015)
Working Paper: Welfare costs of reclassification risk in the health insurance market (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:34189

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