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Advertising and Risk Selection in Health Insurance Markets

Author

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  • Aizawa, Naoki

    () (University of Minnesota)

  • Kim, You Suk

    () (Board of Governors of the Federal Reserve System (U.S.))

Abstract

We study impacts of advertising as a channel of risk selection in Medicare Advantage. We show evidence that both mass and direct mail advertising are targeted to achieve risk selection. We develop and estimate an equilibrium model of Medicare Advantage with advertising to understand its equilibrium impacts. We find that advertising attracts the healthy more than the unhealthy. Moreover, shutting down advertising increases premiums by up to 40% for insurers that advertised by worsening their risk pools, which further reduces the demand of the unhealthy. We argue that risk selection may make consumers better off by improving insurers' risk pools.

Suggested Citation

  • Aizawa, Naoki & Kim, You Suk, 2015. "Advertising and Risk Selection in Health Insurance Markets," Finance and Economics Discussion Series 2015-101, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2015-101
    DOI: 10.17016/FEDS.2015.101
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    File URL: http://dx.doi.org/10.17016/FEDS.2015.101
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    References listed on IDEAS

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    Cited by:

    1. Grundl, Serafin J. & Kim, You Suk, 2017. "Consumer Mistakes and Advertising : The Case of Mortgage Refinancing," Finance and Economics Discussion Series 2017-067, Board of Governors of the Federal Reserve System (U.S.).

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    Keywords

    Advertising; Health insurance; Medicare; Risk selection;

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