Reclassification Risk in the Small Group Health Insurance Market

Fleitas, Sebastián; Gowrisankaran, Gautam; Sasso, Anthony Lo

doi:10.3386/w24663

Cited by 5 publications

(6 citation statements)

References 28 publications

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“…We now claim that  will increase the consumer's expected utility, will not change the expected profit from the contracts, and will preserve no-lapsation if  is small enough, given (18). This contradicts the assumption that  *…”

Section: Proposition and Proofmentioning

confidence: 80%

“…Specifically, we show that if offered the collection of optimal contracts for all types derived above, presented as guaranteed premium path contracts, consumers will self-select, choosing the optimal contract for their type. 18 Specifically, suppose that there is a set Θ of types in the market where, to recall, a consumer's type  = ( ) includes his income path and risk preferences. 19 As above, a guaranteed premium path contract is a  = ( 1     ) that allows the consumer to continue coverage in period  paying premium   provided that he has not previously lapsed.…”

Section: Unobserved Types and Self-selectionmentioning

confidence: 99%

“…Finally, in ongoing work, Atal et al (2019) apply our framework to study the welfare levels of long-term health insurance contracts offered in Germany, and Fleitas et al (2018) use our analysis to guide their study of small group health insurance market in the US.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Optimal Long-Term Health Insurance Contracts: Characterization, Computation, and Welfare Effects

et al. 2021

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Reclassification risk is a major concern in health insurance where contracts are typically one year in length but health shocks often persist for much longer. We theoretically characterize optimal long-term insurance contracts with one-sided commitment, and use our characterization to provide a simple computation algorithm for computing optimal contracts from primitives. We apply this method to derive empirically-based optimal long-term health insurance contracts using all-payers claims data from Utah, and then evaluate the potential welfare performance of these contracts. We find that optimal long-term health insurance contracts that start at age 25 can eliminate over 94% of the welfare loss from reclassification risk for individuals who arrive on the market in good health, but are of little benefit to the worst age-25 health risks. As a result, their ex ante value depends significantly on whether pre-age-25 health risk is otherwise insured. Their value also depends on individuals' expected income growth.

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Section: Proposition and Proofmentioning

confidence: 80%

Section: Unobserved Types and Self-selectionmentioning

confidence: 99%

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Optimal Long-Term Health Insurance Contracts: Characterization, Computation, and Welfare Effects

et al. 2021

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“…The second strand is a very promising line of research that moves away from community rating and studies optimal long‐term contracts (Handel et al 2015, Ghili et al 2020, Fleitas et al 2018). With long‐term contracts, individuals pay high premiums when young so that their future selves can enjoy lower premiums regardless of the future health risk, echoing the idea that longer contracts can diversify risk within individuals as opposed to just across individuals with short‐term contracts.…”

Section: Introductionmentioning

confidence: 99%

Horizon effects and adverse selection in health insurance markets

Darmouni

Zeltzer

2022

Canadian J of Economics

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This paper highlights the idea that increasing the length of insurance contracts can reduce adverse selection in health insurance markets while preserving community rating. Private health insurance contracts in the United States have short, one-year terms, even though health risks may be serially correlated. Intuitively, because risk is mean-reverting, longer contracts allow for pooling of risk within individuals over time, as opposed to just across individuals with traditional short-term contracts. In equilibrium, such horizon effects lead to lower premiums and greater coverage. The mechanism depends on two key conditions. First, the pooling of risk within individuals is the greatest when mean reversion in risk is intermediate. Second, two-sided commitment is present to preserve community rating. Counterfactual analysis using administrative claims data illustrates that a simple reform that implements two-year instead of one-year contracts could increase equilibrium coverage and yield non-trivial welfare gains on net, in spite of restricting consumer choice. Résumé. Effets d'horizon et antisélection sur les marchés d'assurance maladie. L'articlemet en lumière l'idée que la prolongation de la durée des contrats d'assurance peut réduire l'antisélection sur les marchés d'assurance maladie tout en préservant la tarification sans distinction. Aux États-Unis, les contrats d'assurance maladie privés sont de courte durée, soit d'un an, même si les risques sur la santé peuvent être autocorrélés. De façon intuitive, puisque le risque revient à la moyenne, des contrats prolongés permettent la mutualisation du risque pour chaque personne au fil du temps, plutôt que d'une personne à l'autre dans le cadre des contrats traditionnels à court terme. Dans un équilibre, des effets d'horizon de ce genre mènent à des primes moins élevées et à une plus grande couverture. Le mécanisme dépend de deux conditions principales : (i) la mutualisation du risque pour chaque personne est à son maximum lorsque le risque moyen est intermédiaire; (ii) un engagement mutuel est requis pour préserver

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“…Bundorf, Levin and Mahoney (2012) examine the welfare loss from employee selfselection into plans among those offered by their employer. Fleitas, Gowrisankaran and Lo Sasso (2018) estimate the extent of reclassification risk in the experience-rated small group market. Fleitas et al (2021) and Dickstein, Ho and Mark (2021) study the welfare effects of market segmentation, analyzing the small group market and the ACA exchanges.…”

Section: Introductionmentioning

confidence: 99%