Welfare costs of reclassification risk in the health insurance market
One of the major problems of the U.S. health insurance market is that it leaves individuals exposed to reclassification risk. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. A change in the health status can lead to a significant change in the health insurance premium. We study how costly this reclassification risk is for the welfare of consumers. More specifically, we use a general equilibrium model to quantify the implications of introducing guaranteed renewable contracts into the economy calibrated to replicate the key features of the health insurance system in the U.S. Guaranteed renewable contracts are private insurance contracts that can provide protection against reclassification risk even in the absence of consumer commitment or government intervention. We find that though guaranteed renewable contracts provide a good insurance against reclassification risk, the welfare effects from introducing this type of contracts are small. In other words, the presence of reclassification risk does not impose large welfare losses on consumers. This happens because some institutional features in the current U.S. system substitute for the missing explicit contracts that insure reclassification risk. In particular, a good protection against reclassification risk is provided through employer-sponsored health insurance and government means-tested transfers.
|Date of creation:||19 Oct 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mariacristina De Nardi & Eric French & John Bailey Jones, 2009.
"Why do the elderly save? the role of medical expenses,"
Working Paper Series
WP-09-02, Federal Reserve Bank of Chicago.
- Mariacristina De Nardi & Eric French & John B. Jones, 2010. "Why Do the Elderly Save? The Role of Medical Expenses," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 39-75, 02.
- Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the Elderly Save? The Role of Medical Expenses," NBER Working Papers 15149, National Bureau of Economic Research, Inc.
- Massimiliano De Santis, 2007. "Individual Consumption Risk and the Welfare Cost of Business Cycles," American Economic Review, American Economic Association, vol. 97(4), pages 1488-1506, September.
- Ponpoje Porapakkarm & Svetlana Pashchenko, 2011.
"Quantitative Analysis of Health Insurance Reform: Separating Community Rating from Income Redistribution,"
2011 Meeting Papers
1254, Society for Economic Dynamics.
- 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.
- Young, Eric R., 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 36-41, January.
- Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-56, March.
- Hsu, Minchung, 2008. "Health Insurance, the Social Welfare System and Household Saving," MPRA Paper 21281, University Library of Munich, Germany, revised 2010.
- Igal Hendel & Alessandro Lizzeri, 2000.
"The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance,"
NBER Working Papers
7470, National Bureau of Economic Research, Inc.
- Igal Hendel & Alessandro Lizzeri, 2003. "The Role Of Commitment In Dynamic Contracts: Evidence From Life Insurance," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 299-327, February.
- Herring, Bradley & Pauly, Mark V., 2006. "Incentive-compatible guaranteed renewable health insurance premiums," Journal of Health Economics, Elsevier, vol. 25(3), pages 395-417, May.
- Hanming Fang & Edward Kung, 2010.
"How Does Life Settlement Affect the Primary Life Insurance Market?,"
PIER Working Paper Archive
10-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Hanming Fang & Edward Kung, 2010. "How Does Life Settlement Affect the Primary Life Insurance Market?," NBER Working Papers 15761, National Bureau of Economic Research, Inc.
- Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
- Diamond, Peter, 1992. "Organizing the Health Insurance Market," Econometrica, Econometric Society, vol. 60(6), pages 1233-54, November.
- Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005.
"Dynamic Inefficiencies in Insurance Markets: Evidence from long-term care insurance,"
NBER Working Papers
11039, National Bureau of Economic Research, Inc.
- Amy Finkelstein & Kathleen McGarry & Amir Sufi, 2005. "Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance," American Economic Review, American Economic Association, vol. 95(2), pages 224-228, May.
- Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June.
- Glenn Daily & Igal Hendel & Alessandro Lizzeri, 2008. "Does the Secondary Life Insurance Market Threaten Dynamic Insurance?," American Economic Review, American Economic Association, vol. 98(2), pages 151-56, May.
- Karsten Jeske & Sagiri Kitao, 2007.
"U.S. tax policy and health insurance demand: can a regressive policy improve welfare?,"
2007-13, Federal Reserve Bank of Atlanta.
- Jeske, Karsten & Kitao, Sagiri, 2009. "U.S. tax policy and health insurance demand: Can a regressive policy improve welfare?," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 210-221, March.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:34189. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.