Working Paper: NBER ID: w22440
Authors: Michael Geruso
Abstract: In many markets insurers are barred from price discrimination based on consumer characteristics like age, gender, and medical history. In this paper, I build on a recent literature to show why such policies are inefficient if consumers differ in their willingness-to-pay for insurance conditional on the insured losses they generate. Using administrative claims data, I then show that this type of demand heterogeneity is empirically relevant in a consumer health plan setting. Younger and older consumers and men and women reveal strikingly different demand for health insurance, conditional on their objective medical spending risk. This implies that these groups must face different prices in order to sort themselves efficiently across insurance contracts. The theoretical and empirical analysis highlights a fundamental tradeoff between equity and efficiency that is unique to selection markets.
Keywords: No keywords provided
JEL Codes: I11; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand heterogeneity (R22) | Need for discriminatory pricing (D49) |
| Younger and older consumers (D16) | Different demand for health insurance (G52) |
| Age-specific pricing (D49) | Welfare optimization (D69) |
| Nondiscriminatory pricing (D49) | Efficiency costs (D61) |