Selection in Health Insurance Markets and Its Policy Remedies

Journal of Economic Perspectives, Forthcoming

30 Pages Posted: 20 Sep 2017  

Michael Geruso

University of Texas at Austin; National Bureau of Economic Research (NBER)

Timothy J. Layton

Harvard Medical School - Department of Health Care Policy; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: September 19, 2017

Abstract

In this essay, we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates. We begin by outlining some important but often misunderstood differences between two types of conceptual frameworks related to selection. The first, which we call the fixed contracts approach, takes insurance contract provisions as given and views selection as influencing only insurance prices in equilibrium. The second, the endogenous contracts approach, treats selection as also influencing the design of the contract itself, including the overall level of coverage and coverage for services that are differentially demanded by sicker consumers. After outlining the selection problems, we discuss four commonly employed policy instruments that affect the extent and impact of selection: 1) premium rating regulation, including community rating; 2) consumer subsidies or penalties to influence the take-up of insurance; 3) risk adjustment; and 4) contract regulation. We discuss these policies with reference to two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage and the individual insurance markets reformed by the Affordable Care Act of 2010.

Keywords: Risk Adjustment, Adverse Selection, Health Insurance

JEL Classification: I11, I13, I15, H22

Suggested Citation

Geruso, Michael and Layton, Timothy J., Selection in Health Insurance Markets and Its Policy Remedies (September 19, 2017). Journal of Economic Perspectives, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3039775 or http://dx.doi.org/10.2139/ssrn.3039775

Michael Geruso (Contact Author)

University of Texas at Austin ( email )

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Timothy J. Layton

Harvard Medical School - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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