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American Economic Review Vol. 102 No. 7 2012

Pricing and Welfare in Health Plan Choice

M. Kate Bundorf1; Jonathan Levin2; Neale Mahoney3

1 Stanford University School of Medicine, 259 Campus Drive, Stanford, CA 94305-5405. · 2 Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305. · 3 RWJ Scholars in Health Policy Program, Harvard University, 1730 Cambridge Street, Cambridge, MA 02138.

Abstract

Premiums in health insurance markets frequently do not reflect individual differences in costs, either because consumers have private information or because prices are not risk rated. This creates inefficiencies when consumers self-select into plans. We develop a simple econometric model to study this problem and estimate it using data on small employers. We find a welfare loss of 2-11 percent of coverage costs compared to what is feasible with risk rating. Only about one-quarter of this is due to inefficiently chosen uniform contribution levels. We also investigate the reclassification risk created by risk rating individual incremental premiums, finding only a modest welfare cost.

DOI
10.1257/aer.102.7.3214
Volume
102
Issue
7
Pages
3214-3248
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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