Individual Welfare When Consumers Can Shop for Health Insurance

8 Pages Posted: 26 Feb 2016

See all articles by Richard Dusansky

Richard Dusansky

University of Texas at Austin

Çağatay Koç

affiliation not provided to SSRN

Date Written: April 2016

Abstract

The statewide system of health insurance exchanges established by the Affordable Care Act (ACA) of 2010 will allow millions of U.S. citizens to change their health care policies more easily than they can switch automobile or homeowner insurance coverages, because deniability based on prior claim history is illegal. Focusing on this consumer endogeneity of health insurance policy choice, we examine the individual moral hazard welfare implications of a reduction in the price of medical care, which is a potential consequence of the ACA. We show that endogenous policy choice plays a key role in determining the welfare outcome. While moral hazard welfare improvement is not precluded, a distinctly possible outcome is that the consumer revises his/her choice of insurance policy so as to retain some portion of the reduction in expenditure risk caused by the medical care price decrease. In this event, moral hazard welfare loss is higher than it was before the price decrease, although the increased loss is tempered by the endogenous contract choice effect. This result resuscitates an old conventional wisdom.

JEL Classification: I11, I13, I30

Suggested Citation

Dusansky, Richard and Koç, Çağatay, Individual Welfare When Consumers Can Shop for Health Insurance (April 2016). Economic Inquiry, Vol. 54, Issue 2, pp. 1283-1290, 2016, Available at SSRN: https://ssrn.com/abstract=2738283 or http://dx.doi.org/10.1111/ecin.12296

Richard Dusansky (Contact Author)

University of Texas at Austin ( email )

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Çağatay Koç

affiliation not provided to SSRN

No Address Available

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