Working Paper: NBER ID: w14153
Authors: M. Kate Bundorf; Jonathan D. Levin; Neale Mahoney
Abstract: Prices in government and employer-sponsored health insurance markets only partially reflect insurers' expected costs of coverage for different enrollees. This can create inefficient distortions when consumers self-select into plans. We develop a simple model to study this problem and estimate it using new data on small employers. In the markets we observe, the welfare loss compared to the feasible efficient benchmark is around 2-11% of coverage costs. Three-quarters of this is due to restrictions on risk-rating employee contributions; the rest is due to inefficient contribution choices. Despite the inefficiency, we find substantial benefits from plan choice relative to single-insurer options.
Keywords: health insurance; market efficiency; plan choice; welfare loss; risk selection
JEL Codes: D40; D61; D82; I11; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| observed employer contribution policies (J32) | significant social welfare loss (D69) |
| restrictions on risk-rating employee contributions (J32) | significant social welfare loss (D69) |
| inefficient contribution choices (D79) | significant social welfare loss (D69) |
| incorporating private health information into pricing (G52) | increase welfare (I38) |
| observed plan offerings (G52) | substantial benefits compared to single-plan offerings (J32) |
| current pricing institutions (D47) | hinder targeting of households in poor health (I14) |
| pricing policies in place (L11) | inefficient allocation of households to plans (R28) |
| inefficient allocation of households to plans (R28) | inefficiencies in the market (D61) |