Working Paper: NBER ID: w19399
Authors: Benjamin R. Handel; Igal Hendel; Michael D. Whinston
Abstract: This paper studies regulated health insurance markets known as exchanges, motivated by their inclusion in the Affordable Care Act (ACA). We use detailed health plan choice and utilization data to model individual-level projected health risk and risk preferences. We combine the estimated joint distribution of risk and risk preferences with a model of competitive insurance markets to predict outcomes under different regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. \n \nWe find that market unravelling from adverse selection is substantial under the proposed pricing rules in the Affordable Care Act (ACA), implying limited coverage for individuals beyond the lowest coverage (Bronze) health plan permitted. Although adverse selection can be attenuated by allowing (partial) pricing of health status, our estimated risk preferences imply that this would create a welfare loss from reclassification risk that is substantially larger than the gains from increasing within-year coverage, provided that consumers can borrow when young to smooth consumption or that age-based pricing is allowed. We extend the analysis to investigate some related issues, including (i) age-based pricing regulation (ii) exchange participation if the individual mandate is unenforceable and (iii) insurer risk-adjustment transfers.
Keywords: Health Insurance; Adverse Selection; Reclassification Risk; Affordable Care Act
JEL Codes: D82; G22; I11; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pricing rules in the ACA (L11) | extent of coverage available to consumers (G52) |
| adverse selection (D82) | market unraveling (G10) |
| allowing partial pricing of health status (G52) | adverse selection (D82) |
| allowing partial pricing of health status (G52) | reclassification risk (D80) |
| reclassification risk (D80) | welfare loss (D69) |
| increased coverage (G52) | welfare loss (D69) |