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Adverse Selection in Health Insurance

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Author Info
David Cutler (Harvard University and NBER)
Richard Zeckhauser (Harvard University and NBER)

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Abstract

Individual choice among health insurance policies may result in risk-based sorting across plans. Such adverse selection induces three types of losses: efficiency losses from individuals' being allocated to the wrong plans; risk-sharing losses, because premium variability is increased; and losses from insurers' distorting their policies to improve their mix of insureds. We discuss the potential for these losses and present empirical evidence on adverse selection in two groups of employees: Harvard University and the Group Insurance Commission of Massachusetts (serving state and local employees). In both groups, adverse selection is a signiacant concern. Harvard's decision to contribute an equal amount to all insurance plans led to the disappearance of the most generous policy within three years. The Group Insurance Commission has contained adverse selection by subsidizing premiums proportionally and managing the most generous policy very tightly. A combination of prospective or retrospective risk adjustment, coupled with reinsurance for high-cost cases, seems promising as a way to provide appropriate incentives for enrollees and to reduce losses from adverse selection.

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File URL: http://www.bepress.com/cgi/viewcontent.cgi?article=1056&context=fhep
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Publisher Info
Article provided by Berkeley Electronic Press in its journal Forum for Health Economics & Policy.

Volume (Year): 1 (1998)
Issue (Month): 1 ()
Pages: 1056-1056
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Handle: RePEc:bep:fhecpo:v:1:y:1998:i:1:p:1056-1056

Note: oai:bepress:fhep-1056
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. David M. Cutler & Sarah Reber, 1996. "Paying for Health Insurance: The Tradeoff between Competition and Adverse Selection," NBER Working Papers 5796, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Hill, Steven C. & Wolfe, Barbara L., 1997. "Testing the HMO competitive strategy: An analysis of its impact on medical care resources," Journal of Health Economics, Elsevier, vol. 16(3), pages 261-286, June. [Downloadable!] (restricted)
  3. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  4. David M. Cutler & Richard J. Zeckhauser, 1997. "Reinsurance for Catastrophes and Cataclysms," NBER Working Papers 5913, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tsvetanka Karagoyozova & Peter Siegelman, 2006. "Is There Propitious Selection in Insurance Markets?," Working papers 2006-20, University of Connecticut, Department of Economics. [Downloadable!]
  2. Ricardo Sanhueza & Jaime Ruiz-Tagle, 2002. "Choosing Health Insurance in a Dual Health Care System: The Chilean Case," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 157-184, May. [Downloadable!]
  3. Ray Rees & Patricia Apps, 2006. "Genetic testing, income distribution and insurance markets, CHERE Working Paper 2006/3," Working Papers 2006/3, CHERE, University of Technology, Sydney. [Downloadable!]
  4. Alan C. Monheit & Thomas M. Selden, 2000. "Cross-subsidization in the market for employment-related health insurance," Health Economics, John Wiley & Sons, Ltd., vol. 9(8), pages 699-714.
  5. Di Novi, Cinzia, 2008. "Adverse selection in the U.S. health insurance markets: Evidence from the MEPS," P.O.L.I.S. department's Working Papers 103, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
  6. Robert Nuscheler & Thomas Knaus, 2005. "Risk selection in the German public health insurance system," Health Economics, John Wiley & Sons, Ltd., vol. 14(12), pages 1253-1271. [Downloadable!]
  7. Arístides Torche & Carlos Williamson, 1999. "Ajuste de las Primas por Factores de Riesgo en los Planes de Salud de las ISAPRES," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 36(108), pages 761-779. [Downloadable!]
  8. Anupa Bir & Karen Eggleston, 2006. "Measuring Selection Incentives in Managed Care: Evidence from the Massachusetts State Employee Insurance Program," Discussion Papers Series, Department of Economics, Tufts University 0605, Department of Economics, Tufts University. [Downloadable!]
  9. Daniel Altman & David M. Cutler & Richard Zeckhauser, 2000. "Enrollee Mix, Treatment Intensity, and Cost in Competing Indemnity and HMO Plans," NBER Working Papers 7832, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Roger Feldman & Kenneth E. Thorpe & Bradley Gray, 2002. "Policy Watch: The Federal Employees Health Benefits Plan," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 207-217, Spring. [Downloadable!] (restricted)
  11. René C.J.A. van Vliet, 2006. "Free choice of health plan combined with risk-adjusted capitation payments: are switchers and new enrolees good risks?," Health Economics, John Wiley & Sons, Ltd., vol. 15(8), pages 763-774. [Downloadable!]
  12. Richard G. Frank & Jacob Glazer & Thomas G. McGuire, 1998. "Measuring Adverse Selection in Managed Health Care," NBER Working Papers 6825, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Jack, William, 2000. "Health insurance reform in four Latin American countries : theory and practice," Policy Research Working Paper Series 2492, The World Bank. [Downloadable!]
  14. Belli, Paolo, 2001. "How adverse selection affects the health insurance market," Policy Research Working Paper Series 2574, The World Bank. [Downloadable!]
  15. Thomas Buchmueller & John DiNardo, 2002. "Did Community Rating Induce an Adverse Selection Death Spiral? Evidence from New York, Pennsylvania, and Connecticut," American Economic Review, American Economic Association, vol. 92(1), pages 280-294, March. [Downloadable!] (restricted)
  16. repec:fth:prinin:398 is not listed on IDEAS
  17. Helen Levy, 1998. "Who Pays for Health Insurance? Employee Contributions to Health Insurance Premiums," Working Papers 777, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  18. Jacob Glazer & Thomas G. McGuire, 2000. "Optimal Risk Adjustment in Markets with Adverse Selection: An Application to Managed Care," American Economic Review, American Economic Association, vol. 90(4), pages 1055-1071, September. [Downloadable!] (restricted)
  19. Daniel Hamermesh, 1971. "Who `Wins' in Wage Bargaining," Working Papers 398, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
    Other versions:
  20. Denis Drechsler & Johannes Jütting, 2005. "Is There a Role for Private Health Insurance in Developing Countries?," Discussion Papers of DIW Berlin 517, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  21. Jayanta Bhattacharya & William B. Vogt, 2006. "Employment and Adverse Selection in Health Insurance," NBER Working Papers 12430, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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