Econometrica: Jul 2015, Volume 83, Issue 4

Equilibria in Health Exchanges: Adverse Selection versus Reclassification Risk

https://doi.org/10.3982/ECTA12480
p. 1261-1313

B. Handel, I. Hendel, and M. D. Whinston

This paper studies regulated health insurance markets known as exchanges, motivated by the increasingly important role they play in both public and private insurance provision. We develop a framework that combines data on health outcomes and insurance plan choices for a population of insured individuals with a model of a competitive insurance exchange to predict outcomes under different exchange designs. We apply this framework to examine the effects of regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find substantial adverse selection leading to full unraveling of our simulated exchange, even when age can be priced. While the welfare cost of adverse selection is substantial when health status cannot be priced, that of reclassification risk is five times larger when insurers can price based on some health status information. We investigate several extensions including (i) contract design regulation, (ii) self‐insurance through saving and borrowing, and (iii) insurer risk adjustment transfers.



Log In To View Full Content

Supplemental Material

Supplement to “Equilibria in Health Exchanges: Adverse Selection versus Reclassification Risk”

This online appendix has three sections.  The first presents details of the choice model estimation algorithm, as well as additional estimates from our primary specification not included in the main text.  The second describes our model for consumer self-insurance from savings and borrowing in detail.  The third provides additional figures and tables referenced in the main text.

Read More View PDF


Supplement to "Equilibria in Health Exchanges: Adverse Selection versus Reclassification Risk"

This zip file contains the replication files and an additional supplement with additional analysis for the manuscript.

Read More View ZIP


Back