Long-Term Health Insurance: Theory Meets Evidence

Abstract

To insure policyholders against contemporaneous health expenditure shocks and future reclassification risk, long-term health insurance constitutes an alternative to community-rated short-term contracts with an individual mandate. In this paper, we study the German long-term health insurance (GLTHI) from a life-cycle perspective. The GLTHI is one of the few real-world long-term health insurance markets. We first present and discuss insurer regulation, premium setting, and the main market principles of the GLTHI. Then, using unique claims panel data from 620 thousand policyholders over 7 years, we propose a new method to classify and model health transitions. Feeding the empirical inputs into our theoretical model, we assess the welfare effects of the GLTHI over policyholders' lifecycle. We find that GLTHI achieves a high level of welfare against several benchmarks. Finally, we conduct counterfactual policy simulations to illustrate the welfare consequences of integrating GLTHI into a hybrid insurance system similar to the current system in the United States.

Time Aggregation in Health Insurance Deductibles

“…Our model explores the effect of changing the timespan over which a deductible resets, but holds the timespan of the insurance contract itself fixed. A parallel literature finds large welfare gains of long-term health insurance contracts, which accrue by solving selection and reclassification risk issues (Ghili et al, 2021;Atal et al, 2020). While we abstract from these issues and instead focus on the higher-frequency issues of liquidity and moral hazard, analyzing asymmetric information and selection issues raised by resetting deductibles would be an interesting extension.…”

“…A separate optimal contracts literature examines the optimal contract length in environments with adverse selection and reclassification risk(Ghili et al, 2021;Atal et al, 2020). These papers hold the length of a period fixed at a year and thus abstract from within-year dynamics, while our paper holds fixed the contract length but explores within-contract aggregation over time.…”

The Affordable Care Act After a Decade: Industrial Organization of the Insurance Exchanges

“…However, in practice, when health insurance contracts are 1 year in duration, as is typical, it is generally better for both efficiency and equity to limit price discrimination. Although this article focuses on the ACA and insurance contracts that are 1 year in duration, there is recent work on long-term insurance contracts; for example, Ghili et al (2022) and Atal et al (2021) investigate how to overcome some of the key economic inefficiencies that arise from restricting contract length. This, in turn, can generate adverse selection on observables, whereby consumers do not have asymmetric information about their health status but they still generate adverse selection because insurers cannot tailor the prices to their health status (Finkelstein & Poterba 2008).…”