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Minimum Standards and Insurance Regulation: Evidence from the Medigap Market

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  • Amy Finkelstein
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    Abstract

    This paper examines the consequences of imposing binding minimum standards on the market for voluntary private health insurance for the elderly. Theoretically, the effect of these standards on insurance coverage and on welfare is ambiguous. I find robust evidence of a substantial decline in insurance associated with the minimum standards. The central estimates suggest that the standards are associated with an 8 percentage point (25 percent) decrease in the proportion of the population with coverage in the affected market; I find no evidence of substitution to other, unregulated sources of insurance coverage. Additional evidence suggests that the minimum standards are also associated with reduced coverage of non-mandated benefits among the insured. The empirical results are most consistent with a model of the effect of minimum standards on insurance markets with adverse selection, and suggest that adverse selection exacerbates the potential for unintended negative consequences of minimum standards. The final section of the paper considers the welfare implications of the changes in risk bearing associated with the minimum standards. The results suggest that the imposition of these standards was, even under relatively conservative assumptions, welfare reducing on net.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8917.

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    Date of creation: May 2002
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    Publication status: published as Finkelstein, Amy. "Minimum Standards, Insurance Regulation And Adverse Selection: Evidence From The Medigap Market," Journal of Public Economics, 2004, v88(12,Dec), 2515-2547.
    Handle: RePEc:nbr:nberwo:8917

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    1. Halpern, Janice & Hausman, Jerry A., 1986. "Choice under uncertainty: A model of applications for the social security disability insurance program," Journal of Public Economics, Elsevier, Elsevier, vol. 31(2), pages 131-161, November.
    2. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 249-275, February.
    3. Neudeck, Werner & Podczeck, Konrad, 1996. "Adverse selection and regulation in health insurance markets," Journal of Health Economics, Elsevier, Elsevier, vol. 15(4), pages 387-408, August.
    4. Martin Feldstein & Jonathan Gruber, 1995. "A Major Risk Approach to Health Insurance Reform," NBER Chapters, in: Tax Policy and the Economy, Volume 9, pages 103-130 National Bureau of Economic Research, Inc.
    5. Cutler, David M. & Zeckhauser, Richard J., 2000. "The anatomy of health insurance," Handbook of Health Economics, Elsevier, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 11, pages 563-643 Elsevier.
    6. Encinosa, William, 2001. "A comment on Neudeck and Podczeck's "adverse selection and regulation in health insurance markets"," Journal of Health Economics, Elsevier, Elsevier, vol. 20(4), pages 667-673, July.
    7. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    8. Gruber, J., 1992. "State Mandated Benefits and Employer Provided Health Insurance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 92-18, Massachusetts Institute of Technology (MIT), Department of Economics.
    9. Bridgitte C. Madrian, 1994. "The Effect of Health Insurance on Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 181-152.
    10. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(3), pages 3-21, Summer.
    11. Brigitte C. Madrian & Dennis F. Shea, 2001. "THE POWER OF SUGGESTION: INERTIA IN 401(k) PARTICIPATION AND SAVINGS BEHAVIOR," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(4), pages 1149-1187, November.
    12. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
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    Cited by:
    1. Finkelstein, Amy, 2004. "Minimum standards, insurance regulation and adverse selection: evidence from the Medigap market," Journal of Public Economics, Elsevier, Elsevier, vol. 88(12), pages 2515-2547, December.
    2. Sandro Leal Alves, 2004. "Estimando Seleção Adversa Em Planos De Saúde," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of G 098, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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