Reclassification Risk in the Small Group Health Insurance Market

53 Pages Posted: 4 Jun 2018

See all articles by Sebastián Fleitas

Sebastián Fleitas

Universidad de la Republica - Instituto de Economía

Gautam Gowrisankaran

University of Arizona - Eller College of Management; National Bureau of Economic Research (NBER)

Anthony T. Lo Sasso

University of Illinois at Chicago - School of Public Health

Date Written: May 2018

Abstract

We evaluate reclassification risk in the small group health insurance market from a period before ACA community rating regulations. Using detailed individual-level data from a large insurer, we find a pass through of 16% from health risk to premiums with enrollee fixed effects, and 70% without fixed effects. The fixed effects estimates identify the extent to which the insurer passes through changes in risk to changes in premiums while the higher estimates without fixed effects may be due to more risk rating for new accounts. Our estimates control for selection into insurance take-up with a non-parametric selection model, using individual risk and industrial sector as exclusion restrictions. Our results are also robust to other possibilities, including potential measurement error of risk scores and slow pass through over time. We seek to explain why our fixed effects estimates are much closer to community rating than full experience rating. The limited pass through may be due to implicit “guaranteed renewability” contracts with one-sided pricing commitment on the part of the insurer, as our results are broadly consistent with the equilibrium pass through that would occur under these contracts. Our results cannot be explained by market power, search frictions, or slow pass through over time. We simulate the value that is generated by the insurer’s pricing policy relative to counterfactual pricing policies. The insurer’s policy generates 60% of the welfare gain from community rating relative to full experience rating. Even community rated plans generate substantial reclassification risk due to high out-of-pocket costs.

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Suggested Citation

Fleitas, Sebastián and Gowrisankaran, Gautam and Lo Sasso, Anthony T., Reclassification Risk in the Small Group Health Insurance Market (May 2018). NBER Working Paper No. w24663. Available at SSRN: https://ssrn.com/abstract=3189997

Sebastián Fleitas (Contact Author)

Universidad de la Republica - Instituto de Economía ( email )

Uruguay

Gautam Gowrisankaran

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

HOME PAGE: http://econ.arizona.edu/faculty/gowrisankaran.asp

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anthony T. Lo Sasso

University of Illinois at Chicago - School of Public Health ( email )

1603 West Taylor Street
Chicago, IL 60612
United States

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