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Equilibria in Health Exchanges: Adverse Selection versus Reclassification Risk

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  • Ben Handel
  • Igal Hendel
  • Michael D. Whinston

Abstract

This paper studies regulated health insurance markets known as exchanges, motivated by the increasingly important role they play in both public and private insurance provision. We develop a framework that combines data on health outcomes and insurance plan choices for a population of insured individuals with a model of a competitive insurance exchange to predict outcomes under different exchange designs. We apply this framework to examine the effects of regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find substantial adverse selection leading to full unraveling of our simulated exchange, even when age can be priced. While the welfare cost of adverse selection is substantial when health status cannot be priced, that of reclassification risk is five times larger when insurers can price based on some health status information. We investigate several extensions including (i) contract design regulation, (ii) self‐insurance through saving and borrowing, and (iii) insurer risk adjustment transfers.

Suggested Citation

  • Ben Handel & Igal Hendel & Michael D. Whinston, 2015. "Equilibria in Health Exchanges: Adverse Selection versus Reclassification Risk," Econometrica, Econometric Society, vol. 83(4), pages 1261-1313, July.
  • Handle: RePEc:wly:emetrp:v:83:y:2015:i:4:p:1261-1313
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    Cited by:

    1. Juan Pablo Atal & Hanming Fang & Martin Karlsson & Nicolas R. Ziebarth, 2019. "Exit, Voice, or Loyalty? An Investigation Into Mandated Portability of Front‐Loaded Private Health Plans," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(3), pages 697-727, September.
    2. repec:eee:pubeco:v:155:y:2017:i:c:p:21-37 is not listed on IDEAS
    3. Pietro Tebaldi & Alexander Torgovitsky & Hanbin Yang, 2019. "Nonparametric Estimates of Demand in the California Health Insurance Exchange," NBER Working Papers 25827, National Bureau of Economic Research, Inc.
    4. repec:aea:jecper:v:31:y:2017:i:4:p:51-72 is not listed on IDEAS
    5. Bergemann, Dirk & Pavan, Alessandro, 2015. "Introduction to Symposium on Dynamic Contracts and Mechanism Design," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 679-701.
    6. repec:tpr:restat:v:99:y:2017:i:4:p:637-651 is not listed on IDEAS
    7. repec:tpr:restat:v:101:y:2019:i:2:p:326-340 is not listed on IDEAS
    8. Bernard Salanié, 2017. "Equilibrium in Insurance Markets: An Empiricist’s View," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 42(1), pages 1-14, March.
    9. Sonia Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Health Insurance Markups," Working Papers 2017-084, Human Capital and Economic Opportunity Working Group.
    10. Mark Shepard, 2016. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange," NBER Working Papers 22600, National Bureau of Economic Research, Inc.
    11. Michael Geruso & Timothy J. Layton, 2017. "Selection in Health Insurance Markets and Its Policy Remedies," Journal of Economic Perspectives, American Economic Association, vol. 31(4), pages 23-50, Fall.
    12. repec:eee:jhecon:v:63:y:2019:i:c:p:197-222 is not listed on IDEAS
    13. Edmond Baranes & David Bardey, 2015. "Competition between health maintenance organizations and nonintegrated health insurance companies in health insurance markets," Health Economics Review, Springer, vol. 5(1), pages 1-9, December.
    14. Hanming Fang & Ami Ko, 2018. "Partial Rating Area Offering in the ACA Marketplaces: Facts, Theory and Evidence," PIER Working Paper Archive 18-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Oct 2018.
    15. Sonia Jaffe & Anup Malani, 2017. "The Welfare Implications of Health Insurance," Working Papers 2017-045, Human Capital and Economic Opportunity Working Group.
    16. repec:pal:genrir:v:42:y:2017:i:2:d:10.1057_s10713-017-0022-7 is not listed on IDEAS
    17. repec:kap:geneva:v:42:y:2017:i:2:d:10.1057_s10713-017-0022-7 is not listed on IDEAS
    18. Benjamin R. Handel & Igal Hendel & Michael D. Whinston, 2017. "The Welfare Effects of Long-Term Health Insurance Contracts," NBER Working Papers 23624, National Bureau of Economic Research, Inc.
    19. repec:bla:randje:v:47:y:2016:i:4:p:998-1028 is not listed on IDEAS
    20. repec:aea:aejapp:v:11:y:2019:i:2:p:1-36 is not listed on IDEAS
    21. repec:aea:aejpol:v:10:y:2018:i:4:p:302-43 is not listed on IDEAS
    22. Sonia P. Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Imperfect Competition in Health Insurance," NBER Working Papers 23104, National Bureau of Economic Research, Inc.
    23. Gemmo, Irina & Kubitza, Christian & Rothschild, Casey G., 2018. "The existence of the Miyazaki-Wilson-Spence equilibrium with continuous type distributions," ICIR Working Paper Series 32/18, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).

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