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Incentive-Compatible Guaranteed Renewable Health Insurance

Author

Listed:
  • Bradley Herring
  • Mark Pauly

Abstract

Multi-period theoretical models of renewable insurance display front-loaded premium schedules that both cover lifetime total claims of low-risk and high-risk individuals and provide an incentive for those who remain low-risk to continue to purchase the policy. In practice, however, an age profile of premiums that decreases with age might result in relatively high premiums for younger individuals which they may consider unaffordable. In this paper, we use medical expenditure data to estimate an optimal competitive age-based premium schedule for a benchmark renewable health insurance policy. We find that the amount of prepayment by younger individuals that would be necessary to cover future claims is mitigated by three factors: high-risk individuals will either recover or die, low-risk expected expense increases with age, and the likelihood of developing a high-risk condition increases with age. Although medical cost growth over time increases the amount of prepayment necessary, the resulting optimal premium path generally increases with age. We also find that actual premium paths exhibited by purchasers of individual insurance with guaranteed renewability is close to the optimal schedule we estimate. Finally, we examine consumers' gain in expected utility associated with the guaranteed renewability feature.

Suggested Citation

  • Bradley Herring & Mark Pauly, 2003. "Incentive-Compatible Guaranteed Renewable Health Insurance," NBER Working Papers 9888, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9888
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    File URL: http://www.nber.org/papers/w9888.pdf
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    References listed on IDEAS

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    1. Frick, Kevin D, 1998. "Consumer Capital Market Constraints and Guaranteed Renewable Insurance," Journal of Risk and Uncertainty, Springer, vol. 16(3), pages 271-278, July-Aug..
    2. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-473, June.
    3. David M. Cutler, 1993. "Why Doesn't the Market Fully Insure Long-Term Care?," NBER Working Papers 4301, National Bureau of Economic Research, Inc.
    4. Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-156, March.
    5. Feldman, Roger & Dowd, Bryan, 1991. "A New Estimate of the Welfare Loss of Excess Health Insurance," American Economic Review, American Economic Association, vol. 81(1), pages 297-301, March.
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    Cited by:

    1. Florian Baumann & Volker Meier & Martin Werding, 2008. "Transferable Ageing Provisions in Individual Health Insurance Contracts," German Economic Review, Verein für Socialpolitik, vol. 9, pages 287-311, August.
    2. H. Brown & Luke Connelly, 2005. "Lifetime Cover in Private Insurance Markets," International Journal of Health Economics and Management, Springer, vol. 5(1), pages 75-88, January.
    3. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2010. "Quantitative Analysis of Health Insurance Reform: Separating Community Rating from Income Redistribution," MPRA Paper 26158, University Library of Munich, Germany.
    4. Werding, Martin & McLennan, Stuart, 2011. "International portability of health-cost coverage : concepts and experience," Social Protection and Labor Policy and Technical Notes 63929, The World Bank.
    5. Connelly, Luke B. & Brown III, H. Shelton, 2008. "Lifetime Fairness? Taxes, Subsidies, Age-Based Penalties, and the Price of Health Insurance in Australia," MPRA Paper 14671, University Library of Munich, Germany.
    6. Volker Meier, 2005. "Efficient Transfer of Aging Provisions in Private Health Insurance," Journal of Economics, Springer, vol. 84(3), pages 249-275, May.
    7. Mark V. Pauly, 2003. "Time, Risk, Precommitment, and Adverse Selection in Competitive Insurance Markets," CESifo Working Paper Series 1068, CESifo Group Munich.
    8. H. Shelton Brown & Luke Connelly, 2005. "Market failure in long-term private health insurance markets: a proposed solution," Applied Economics Letters, Taylor & Francis Journals, vol. 12(5), pages 281-284.
    9. Anne-Fleur Roos & Frederik Schut, 2012. "Spillover effects of supplementary on basic health insurance: evidence from the Netherlands," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 13(1), pages 51-62, February.

    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I10 - Health, Education, and Welfare - - Health - - - General

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