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Employment and Adverse Selection in Health Insurance

Author

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  • Jayanta Bhattacharya
  • William B. Vogt

Abstract

We construct and test a new model of employer-provided health insurance provision in the presence of adverse selection in the health insurance market. In our model, employers cannot observe the health of their employees, but can decide whether to offer insurance. Employees sort themselves among employers who do and do not offer insurance on the basis of their current health status and the probability distribution over future health status changes. We show that there exists a pooling equilibrium in which both sick and healthy employees are covered as long as the costs of job switching are higher than the persistence of health status. We test and verify some of the key implications of our model using data from the Current Population Survey, linked to information provided by the U.S. Department of Labor about the job-specific human capital requirements of jobs.

Suggested Citation

  • Jayanta Bhattacharya & William B. Vogt, 2006. "Employment and Adverse Selection in Health Insurance," NBER Working Papers 12430, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12430
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    References listed on IDEAS

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    1. Thomas Buchmueller & John Dinardo, 2002. "Did Community Rating Induce an Adverse Selection Death Spiral? Evidence from New York, Pennsylvania, and Connecticut," American Economic Review, American Economic Association, vol. 92(1), pages 280-294, March.
    2. Gruber, Jonathan & Madrian, Brigitte C., 1997. "Employment separation and health insurance coverage," Journal of Public Economics, Elsevier, vol. 66(3), pages 349-382, December.
    3. N/A, 2003. "Abstracts," The Journal of Entrepreneurship, Entrepreneurship Development Institute of India, vol. 12(2), pages 251-270, September.
    4. N/A, 2003. "Abstracts," The Journal of Entrepreneurship, Entrepreneurship Development Institute of India, vol. 12(1), pages 131-154, March.
    5. Cutler, David M., 2002. "Health care and the public sector," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 31, pages 2143-2243 Elsevier.
    6. Douglas Holtz-Eakin, 1994. "Health Insurance Provision and Labor Market Efficiency in the United States and Germany," NBER Chapters,in: Social Protection versus Economic Flexibility: Is There a Trade-Off?, pages 157-188 National Bureau of Economic Research, Inc.
    7. David M. Cutler & Richard J. Zeckhauser, 1998. "Adverse Selection in Health Insurance," NBER Chapters,in: Frontiers in Health Policy Research, Volume 1, pages 1-32 National Bureau of Economic Research, Inc.
    8. Crocker, Keith J & Moran, John R, 2003. " Contracting with Limited Commitment: Evidence from Employment-Based Health Insurance Contracts," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 694-718, Winter.
    9. Brigitte C. Madrian, 1994. "Employment-Based Health Insurance and Job Mobility: Is there Evidence of Job-Lock?," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 27-54.
    10. Cutler, David M. & Zeckhauser, Richard J., 2000. "The anatomy of health insurance," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 11, pages 563-643 Elsevier.
    11. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-473, June.
    12. Bruce C. Fallick & Charles A. Fleischman, 2004. "Employer-to-employer flows in the U.S. labor market: the complete picture of gross worker flows," Finance and Economics Discussion Series 2004-34, Board of Governors of the Federal Reserve System (U.S.).
    13. Jonathan Gruber, 2000. "Tax Subsidies for Health Insurance: Evaluating the Costs and Benefits," NBER Working Papers 7553, National Bureau of Economic Research, Inc.
    14. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-641, June.
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    16. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
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    18. David M. Cutler & Sarah J. Reber, 1998. "Paying for Health Insurance: The Trade-Off between Competition and Adverse Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 433-466.
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    Citations

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    Cited by:

    1. Thomas C. Buchmueller & Alan C. Monheit, 2009. "Employer-Sponsored Health Insurance and the Promise of Health Insurance Reform," NBER Working Papers 14839, National Bureau of Economic Research, Inc.
    2. Stéphanie Lluis & Jean Abraham, 2013. "The Wage–Health Insurance Trade-off and Worker Selection: Evidence From the Medical Expenditure Panel Survey 1997 to 2006," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 52(2), pages 541-581, April.
    3. Lakdawalla, Darius & Sood, Neeraj, 2013. "Health insurance as a two-part pricing contract," Journal of Public Economics, Elsevier, vol. 102(C), pages 1-12.
    4. Laura Bucila, 2008. "Employment-Based Health Insurance and the Minimum Wage," Working Papers 0812, College of the Holy Cross, Department of Economics.
    5. Bundorf M. Kate & Herring Bradley & Pauly Mark V., 2010. "Health Risk, Income, and Employment-Based Health Insurance," Forum for Health Economics & Policy, De Gruyter, vol. 13(2), pages 1-35, September.
    6. Kanika Kapur & José J. Escarce & M Susan Marquis & Kosali I. Simon, 2008. "Where Do The Sick Go? Health Insurance and Employment in Small and Large Firms," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 644-664, January.

    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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