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Adverse Selection and an Individual Mandate: When Theory Meets Practice

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  • Martin B. Hackmann
  • Jonathan T. Kolstad
  • Amanda E. Kowalski

Abstract

We develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. We identify a set of key parameters for welfare analysis, allowing us to model the welfare impact of the actual policy as well as to estimate the socially optimal penalty level. Using data from Massachusetts, we estimate the key parameters of the model. We compare health insurance coverage, premiums, and insurer average health claim expenditures between Massachusetts and other states in the periods before and after the passage of Massachusetts health reform. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate; consistent with an initially adversely selected insurance market. We are also able to recover an estimated willingness-to-pay for health insurance. Combining demand and cost estimates as sufficient statistics for welfare analysis, we find an annual welfare gain of $335 dollars per person or $71 million annually in Massachusetts as a result of the reduction in adverse selection. We also find evidence for smaller post-reform markups in the individual market, which increased welfare by another $107 dollars per person per year and about $23 million per year overall. To put this in perspective, the total welfare gains were 8.4% of medical expenditures paid by insurers. Our model and empirical estimates suggest an optimal mandate penalty of $2,190. A penalty of this magnitude would increase health insurance to near universal levels. Our estimated optimal penalty is higher than the individual mandate penalty adopted in Massachusetts but close to the penalty implemented under the ACA.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19149.

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Date of creation: Jun 2013
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Handle: RePEc:nbr:nberwo:19149

Note: AG HC HE IO PE
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References

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  1. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2010. "Optimal Mandates and the Welfare Cost of Asymmetric Information: Evidence From the U.K. Annuity Market," Econometrica, Econometric Society, vol. 78(3), pages 1031-1092, 05.
  2. M. Kate Bundorf & Jonathan D. Levin & Neale Mahoney, 2008. "Pricing and Welfare in Health Plan Choice," NBER Working Papers 14153, National Bureau of Economic Research, Inc.
  3. Martin B. Hackmann & Jonathan T. Kolstad & Amanda E. Kowalski, 2012. "Health Reform, Health Insurance, and Selection: Estimating Selection into Health Insurance Using the Massachusetts Health Reform," Cowles Foundation Discussion Papers 1841, Cowles Foundation for Research in Economics, Yale University.
  4. Jeffrey Clemens, 2012. "Regulatory Redistribution in the Market for Health Insurance," Discussion Papers 11-011, Stanford Institute for Economic Policy Research.
  5. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 877-921, August.
  6. Jonathan T. Kolstad & Amanda E. Kowalski, 2010. "The Impact of Health Care Reform On Hospital and Preventive Care: Evidence from Massachusetts," NBER Working Papers 16012, National Bureau of Economic Research, Inc.
  7. Jonathan T. Kolstad & Amanda E. Kowalski, 2012. "Mandate-Based Health Reform and the Labor Market: Evidence from the Massachusetts Reform," Cowles Foundation Discussion Papers 1855, Cowles Foundation for Research in Economics, Yale University.
  8. Andrew Beauchamp & Mathis Wagner, 2012. "Dying to Retire: Adverse Selection and Welfare in Social Security," Boston College Working Papers in Economics 818, Boston College Department of Economics, revised 15 Aug 2013.
  9. Leemore S. Dafny, 2010. "Are Health Insurance Markets Competitive?," American Economic Review, American Economic Association, vol. 100(4), pages 1399-1431, September.
  10. David M. Cutler & Jonathan Gruber, 1995. "Does Public Insurance Crowd Out Private Insurance?," NBER Working Papers 5082, National Bureau of Economic Research, Inc.
  11. Keith Marzilli Ericson & Judd B. Kessler, 2013. "The Articulation Effect of Government Policy: Health Insurance Mandates Versus Taxes," NBER Working Papers 18913, National Bureau of Economic Research, Inc.
  12. 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.
  13. Liran Einav & Amy Finkelstein & Jonathan Levin, 2009. "Beyond Testing: Empirical Models of Insurance Markets," NBER Working Papers 15241, National Bureau of Economic Research, Inc.
  14. Keith M. Marzilli Ericson & Amanda Starc, 2012. "Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange," NBER Working Papers 18089, National Bureau of Economic Research, Inc.
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  1. #HEJC papers for August 2013
    by academichealtheconomists in The Academic Health Economists' Blog on 2013-07-31 23:00:48
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Cited by:
  1. Craig Garthwaite & Tal Gross & Matthew J. Notowidigdo, 2013. "Public Health Insurance, Labor Supply, and Employment Lock," NBER Working Papers 19220, National Bureau of Economic Research, Inc.

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