Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance

55 Pages Posted: 3 Nov 2008 Last revised: 4 Jul 2010

See all articles by Randall Cebul

Randall Cebul

Case Western Reserve University - Center for Health Care Research and Policy

James B. Rebitzer

Boston University School of Management; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics; Bard College - The Levy Economics Institute

Lowell J. Taylor

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Mark Votruba

Case Western Reserve University - Weatherhead School of Management

Date Written: October 2008

Abstract

We analyze the role of search frictions in the market for commercial health insurance. Frictions increase the cost of insurance by enabling insurers to set price above marginal cost, and by creating incentives for inefficiently high levels of marketing. Frictions also lead to price dispersion for identical products and, as a consequence, to increases in the rate of insurance turnover. Our empirical analysis indicates that frictions increase prices enough to transfer 13.2% of consumer surplus from employer groups to insurers (approximately $34.4 billion in 1997), and increase employer group turnover by 64% for the average insurance policy. This heightened turnover reduces insurer incentives to invest in the future health of their policy holders. Our analysis also suggests that a publicly-financed insurance option might improve private insurance markets by reducing distortions induced by search frictions.

Suggested Citation

Cebul, Randall and Rebitzer, James B. and Taylor, Lowell J. and Votruba, Mark, Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance (October 2008). NBER Working Paper No. w14455. Available at SSRN: https://ssrn.com/abstract=1294130

Randall Cebul

Case Western Reserve University - Center for Health Care Research and Policy ( email )

2500 MetroHealth Drive
Cleveland, OH 44109
United States

James B. Rebitzer (Contact Author)

Boston University School of Management ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617 353 4605 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504
United States

Lowell J. Taylor

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States
412-268-3278 (Phone)
412-268-7036 (Fax)

Mark Votruba

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

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