Moral Hazard Induced Unraveling
66 Pages Posted: 10 Sep 2016 Last revised: 23 Mar 2023
Date Written: March 31, 2019
We identify and quantify a new form of welfare loss in insurance markets. We show that moral hazard from means-tested, out-of-pocket subsidies combined with community rating mimics adverse selection and can unravel insurance markets. We show that this is occurring on the ACA exchanges, where out-of-pocket subsidies to low-income consumers lead to higher costs to insurers through moral hazard. Using exogenous variation in the number of highly subsidized enrollees on the ACA exchanges, we show that this moral hazard cost has led to higher premiums, which has lowered enrollment among the unsubsidized by 7\%. We estimate the welfare costs of this ``moral hazard induced unraveling'' to be around 25\% of the welfare loss from adverse selection.
Keywords: Affordable Care Act, Health Insurance, Moral Hazard, Unraveling
JEL Classification: I13, I18, I38, G22
Suggested Citation: Suggested Citation