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Selection in Health Insurance Markets and Its Policy Remedies

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  • Michael Geruso
  • Timothy Layton

Abstract

In this essay, we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates. We begin by outlining some important but often misunderstood differences between two types of conceptual frameworks related to selection. The first, which we call the fixed contracts approach, takes insurance contract provisions as given and views selection as influencing only insurance prices in equilibrium. The second, the endogenous contracts approach, treats selection as also influencing the design of the contract itself, including the overall level of coverage and coverage for services that are differentially demanded by sicker consumers. After outlining the selection problems, we discuss four commonly employed policy instruments that affect the extent and impact of selection: 1) premium rating regulation, including community rating; 2) consumer subsidies or penalties to influence the take-up of insurance; 3) risk adjustment; and 4) contract regulation. We discuss these policies with reference to two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage and the individual insurance markets reformed by the Affordable Care Act of 2010.

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  • Michael Geruso & Timothy Layton, 2017. "Selection in Health Insurance Markets and Its Policy Remedies," NBER Working Papers 23876, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23876
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    Cited by:

    1. Layton, Timothy J. & McGuire, Thomas G. & van Kleef, Richard C., 2018. "Deriving risk adjustment payment weights to maximize efficiency of health insurance markets," Journal of Health Economics, Elsevier, vol. 61(C), pages 93-110.
    2. Minke Remmerswaal & Jan Boone & Rudy Douven, 2019. "Selection and moral hazard effects in healthcare," CPB Discussion Paper 393, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Keaton S. Miller & Amil Petrin & Robert Town & Michael Chernew, 2019. "Optimal Managed Competition Subsidies," NBER Working Papers 25616, National Bureau of Economic Research, Inc.
    4. Damon Jones & David Molitor & Julian Reif, 2019. "What do Workplace Wellness Programs do? Evidence from the Illinois Workplace Wellness Study," The Quarterly Journal of Economics, Oxford University Press, vol. 134(4), pages 1747-1791.
    5. Daniel Garcia & Roee Teper & Matan Tsur, 2018. "Information Design in Insurance Markets: Selling Peaches in a Market for Lemons," CESifo Working Paper Series 6853, CESifo.
    6. Minke Remmerswaal & Jan Boone & Rudy Douven, 2019. "Selection and moral hazard effects in healthcare," CPB Discussion Paper 393.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Gemmo, Irina & Kubitza, Christian & Rothschild, Casey, 2020. "Constrained efficient equilibria in selection markets with continuous types," Journal of Public Economics, Elsevier, vol. 190(C).
    8. Richard Domurat & Isaac Menashe & Wesley Yin, 2019. "The Role of Behavioral Frictions in Health Insurance Marketplace Enrollment and Risk: Evidence from a Field Experiment," NBER Working Papers 26153, National Bureau of Economic Research, Inc.
    9. Shuli Brammli-Greenberg & Jacob Glazer & Ruth Waitzberg, 2019. "Modest risk-sharing significantly reduces health plans’ incentives for service distortion," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 20(9), pages 1359-1374, December.
    10. Timothy J. Layton & Nicole Maestas & Daniel Prinz & Boris Vabson, 2019. "Private vs. Public Provision of Social Insurance: Evidence from Medicaid," NBER Working Papers 26042, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H4 - Public Economics - - Publicly Provided Goods
    • I1 - Health, Education, and Welfare - - Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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