Working Paper: NBER ID: w14455
Authors: Randall D. Cebul; James B. Rebitzer; Lowell J. Taylor; Mark E. Votruba
Abstract: We analyze the role of search frictions in the market for commercial health insurance. Frictions increase the cost of insurance by enabling insurers to set price above marginal cost, and by creating incentives for inefficiently high levels of marketing. Frictions also lead to price dispersion for identical products and, as a consequence, to increases in the rate of insurance turnover. Our empirical analysis indicates that frictions increase prices enough to transfer 13.2% of consumer surplus from employer groups to insurers (approximately $34.4 billion in 1997), and increase employer group turnover by 64% for the average insurance policy. This heightened turnover reduces insurer incentives to invest in the future health of their policy holders. Our analysis also suggests that a publicly-financed insurance option might improve private insurance markets by reducing distortions induced by search frictions.
Keywords: health insurance; search frictions; market efficiency; consumer surplus
JEL Codes: I11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| turnover rates (J63) | insurers' incentives to invest in future health of policyholders (G52) |
| publicly financed insurance option (I13) | improvement in private insurance markets (G52) |
| search frictions (F12) | insurance costs (G52) |
| search frictions (F12) | price dispersion (L11) |
| search frictions (F12) | turnover rates (J63) |
| search frictions (F12) | transfer of consumer surplus (F16) |