Reclassification Risk in the Small Group Health Insurance Market

57 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. Reclassification risk in this setting is of key policy relevance and also a matter of debate. We use detailed claims and premiums data from a large insurance company and control non-parametrically for selection. We find a pass through of 16% from changes in health risk to changes in premiums, with a stronger equilibrium relationship between premiums and risk. This pattern is consistent with the insurer implicitly offering “guaranteed renewability” contracts with one-sided pricing commitment. We further find that groups whose health risk decreases have premiums that are more responsive to risk, which the guaranteed renewability model attributes to ex post renegotiation. The observed pricing policy adds 60% of the consumer welfare gain from community rating relative to experience rating. The welfare gains are limited because employers and employees switch coverage frequently.

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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