Working Paper: NBER ID: w28779
Authors: Victoria R. Marone; Adrienne Sabety
Abstract: We study the welfare effects of offering choice over coverage levels—“vertical choice”—in regulated health insurance markets. We emphasize that heterogeneity in the efficient level of coverage is not sufficient to motivate choice. When premiums do not reflect individuals' costs, it may not be in consumers' best interest to select their efficient coverage level. We show that vertical choice is efficient only if consumers with higher willingness to pay for insurance have a higher efficient level of coverage. We investigate this condition empirically and find that as long as a minimum coverage level can be enforced, the welfare gains from vertical choice are either zero or economically small.
Keywords: health insurance; vertical choice; welfare effects; consumer behavior
JEL Codes: D82; G22; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| vertical choice (L22) | economically small welfare gains (D69) |
| higher willingness to pay (D11) | efficient level of coverage (G52) |
| willingness to pay (D11) | social surplus (D69) |
| sick consumers (I12) | higher willingness to pay (D11) |
| minimum coverage level (G52) | favorable outcomes in terms of welfare (I31) |
| lack of alignment between private and social incentives (D82) | inefficient outcomes (D61) |