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Death Spiral or Euthanasia? The Demise of Generous Group Health Insurance Coverage

  • Mark V. Pauly
  • Olivia Mitchell
  • Yuhui Zeng

Employers must determine which sorts of healthcare insurance plans to offer employees and also set employee premiums for each plan provided. Depending on how they structure the premiums that employees pay across different healthcare insurance plans, plan sponsors alter the incentives to choose one plan over another. If employees know they differ by risk level but premiums do not fully reflect these risk differences, this can give rise to a so-called "death spiral" due to adverse selection. In this paper use longitudinal information from a natural experiment in the management of health benefits for a large employer to explore the impact of moving from a fixed dollar contribution policy to a risk-adjusted employer contribution policy. Our results suggest that implementing a significant risk adjustment had no discernable effect on adverse selection against the most generous indemnity insurance policy. This stands in stark contrast to previous studies, which have tended to find large impacts. Further analysis suggests that previous studies which appeared to detect plans in the throes of a death spiral, may instead have been experiencing an inexorable movement away from a non-preferred product, one that would have been inefficient for almost all workers even in the absence of adverse selection.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10464.

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Date of creation: May 2004
Date of revision:
Publication status: published as Pauly, Mark, Olivia Mitchell, and Peter Zeng. “Death Spiral or Euthanasia? The Demise of Generous Group Health Insurance Coverage.” Inquiry 44, 4 (Winter 2007): 412-427.
Handle: RePEc:nbr:nberwo:10464
Note: HE
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  1. David M. Cutler & Richard J. Zeckhauser, 1999. "The Anatomy of Health Insurance," NBER Working Papers 7176, National Bureau of Economic Research, Inc.
  2. Anne Beeson Royalty & Neil Solomon, 1999. "Health Plan Choice: Price Elasticities in a Managed Competition Setting," Journal of Human Resources, University of Wisconsin Press, vol. 34(1), pages 1-41.
  3. Beaulieu, Nancy Dean, 2002. "Quality information and consumer health plan choices," Journal of Health Economics, Elsevier, vol. 21(1), pages 43-63, January.
  4. Melissa W. Barringer & Olivia S. Mitchell, . "Workers' Preferences Among Company-Provided Health Insurance Plans," Pension Research Council Working Papers 94-5, Wharton School Pension Research Council, University of Pennsylvania.
  5. David M. Cutler & Sarah Reber, 1996. "Paying for Health Insurance: The Tradeoff between Competition and Adverse Selection," NBER Working Papers 5796, National Bureau of Economic Research, Inc.
  6. Roger Feldman & Michael Finch & Bryan Dowd & Steven Cassou, 1989. "The Demand for Employment-Based Health Insurance Plans," Journal of Human Resources, University of Wisconsin Press, vol. 24(1), pages 115-142.
  7. Strombom, Bruce A. & Buchmueller, Thomas C. & Feldstein, Paul J., 2002. "Switching costs, price sensitivity and health plan choice," Journal of Health Economics, Elsevier, vol. 21(1), pages 89-116, January.
  8. Buchmueller, Thomas C. & Feldstein, Paul J., 1997. "The effect of price on switching among health plans," Journal of Health Economics, Elsevier, vol. 16(2), pages 231-247, April.
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