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Pricing and Welfare in Health Plan Choice

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  • M. Kate Bundorf
  • Jonathan D. Levin
  • Neale Mahoney

Abstract

Prices in government and employer-sponsored health insurance markets only partially reflect insurers' expected costs of coverage for different enrollees. This can create inefficient distortions when consumers self-select into plans. We develop a simple model to study this problem and estimate it using new data on small employers. In the markets we observe, the welfare loss compared to the feasible efficient benchmark is around 2-11% of coverage costs. Three-quarters of this is due to restrictions on risk-rating employee contributions; the rest is due to inefficient contribution choices. Despite the inefficiency, we find substantial benefits from plan choice relative to single-insurer options.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14153.

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Date of creation: Jun 2008
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Publication status: published as M. Kate Bundorf & Jonathan Levin & Neale Mahoney, 2012. "Pricing and Welfare in Health Plan Choice," American Economic Review, American Economic Association, vol. 102(7), pages 3214-48, December.
Handle: RePEc:nbr:nberwo:14153

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