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Welfare Costs of Reclassification Risk in the Health Insurance Market

55 Pages Posted: 19 Oct 2011 Last revised: 19 May 2015

Svetlana Pashchenko

University of Georgia

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo)

Date Written: April 7, 2015

Abstract

We assess the quantitative importance of reclassification risk in the US health insurance market. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. Thus, a change in the health status can lead to a significant change in the health insurance premium. We measure welfare gains from introducing explicit insurance against this risk in the form of guaranteed renewable health insurance contracts. We find that in the current institutional environment individuals are well-sheltered against reclassification risk and they only moderately gain from having access to these contracts. More specifically, we show that employer-sponsored health insurance and public means-tested transfers play an important role in providing implicit insurance against reclassification risk. If these institutions are removed, the average welfare gains from having access to guaranteed renewable contracts exceed 4% of the annual consumption.

Keywords: health insurance, reclassification risk, dynamic insurance, guaranteed renewable contracts, general equilibrium

JEL Classification: D52, D58, D91, G22, I11

Suggested Citation

Pashchenko, Svetlana and Porapakkarm, Ponpoje, Welfare Costs of Reclassification Risk in the Health Insurance Market (April 7, 2015). Available at SSRN: https://ssrn.com/abstract=1946152 or http://dx.doi.org/10.2139/ssrn.1946152

Svetlana Pashchenko

University of Georgia ( email )

Athens, GA 30602-6254
United States

Ponpoje Porapakkarm (Contact Author)

National Graduate Institute for Policy Studies (GRIPS, Tokyo) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan
+818095248741 (Phone)

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