Working Paper: NBER ID: w23624
Authors: Benjamin R. Handel; Igal Hendel; Michael D. Whinston
Abstract: Reclassification risk is a major concern in health insurance. We use a rich dataset with individual-level information on health risk to empirically study one possible solution: dynamic contracts. Empirically, dynamic contracts with one-sided commitment substantially reduce the reclassification risk present with spot contracting, achieving close to the first-best for consumers with flat net income paths. Gains are smaller for consumers with net income growth, and these consumers prefer ACA-like community rating over dynamic contracts. However, lower risk aversion, sufficient switching costs, or government insurance of pre-age-25 health risks can raise welfare with dynamic contracts above the level in ACA-like markets.
Keywords: health insurance; dynamic contracts; reclassification risk; welfare effects
JEL Codes: G22; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynamic contracts with one-sided commitment (D86) | reclassification risk (D80) |
| dynamic contracts (D86) | welfare for consumers with flat net income paths (D11) |
| rising net income paths (E25) | welfare gains from dynamic contracts (J41) |
| lower risk aversion (D81) | welfare outcomes with dynamic contracts (J41) |
| sufficient switching costs (L15) | welfare outcomes with dynamic contracts (J41) |
| government insurance of pre-age 25 health risks (I13) | welfare outcomes with dynamic contracts (J41) |
| income growth trajectory (O49) | consumer preferences for contract types (K12) |