Working Paper: NBER ID: w24663
Authors: Sebastin Fleitas; Gautam Gowrisankaran; Anthony Lo Sasso
Abstract: We evaluate health insurance reclassification risk in the Small Group Market from a period before ACA community rating regulations. Reclassification risk in this setting is of key policy relevance and also a matter of debate. We use detailed claims and premiums data from a large insurance company and control non-parametrically for selection. We find a pass-through of 16% from changes in health risk to changes in premiums, with a stronger equilibrium relationship between premiums and risk. This pattern is consistent with the insurer implicitly offering “guaranteed renewability” contracts with one-sided pricing commitment. We further find that groups whose health risk decreases have premiums that are more responsive to risk, which the guaranteed renewability model attributes to ex-post renegotiation. The observed pricing policy adds 55% of the consumer welfare gain from community rating relative to experience rating. The welfare gains are limited because employers and employees switch coverage frequently.
Keywords: reclassification risk; health insurance; small group market; community rating; premium pricing
JEL Codes: D25; I13; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| health risk (I12) | premiums (G22) |
| unit decrease in ACG score (C22) | premiums (G22) |
| pricing policies (L11) | consumer welfare (D69) |
| market dynamics (D49) | welfare outcomes (I38) |