The Welfare Effects of Long-Term Health Insurance Contracts

58 Pages Posted: 4 Aug 2017 Last revised: 21 Jul 2022

See all articles by Benjamin Handel

Benjamin Handel

University of California, Berkeley

Igal Hendel

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Michael D. Whinston

Sloan School of Management and Department of Economics

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Date Written: July 2017

Abstract

Reclassification risk is a major concern in health insurance. We use a rich dataset with individual-level information on health risk to empirically study one possible solution: dynamic contracts. Empirically, dynamic contracts with one-sided commitment substantially reduce the reclassification risk present with spot contracting, achieving close to the first-best for consumers with flat net income paths. Gains are smaller for consumers with net income growth, and these consumers prefer ACA-like community rating over dynamic contracts. However, lower risk aversion, sufficient switching costs, or government insurance of pre-age-25 health risks can raise welfare with dynamic contracts above the level in ACA-like markets.

Suggested Citation

Handel, Benjamin and Hendel, Igal E. and Whinston, Michael D., The Welfare Effects of Long-Term Health Insurance Contracts (July 2017). NBER Working Paper No. w23624, Available at SSRN: https://ssrn.com/abstract=3011102

Benjamin Handel (Contact Author)

University of California, Berkeley ( email )

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Berkeley, CA 94720
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Igal E. Hendel

Northwestern University - Department of Economics ( email )

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Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Michael D. Whinston

Sloan School of Management and Department of Economics ( email )

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E62-416
Cambridge, MA 02142
United States

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