Welfare Impacts of Genetic Testing in Health Insurance Markets: Will Cross-Subsidies Survive?

54 Pages Posted: 26 Jun 2019

See all articles by Philippe De Donder

Philippe De Donder

University of Toulouse 1 - Toulouse School of Economics (TSE)

David Bardey

Universidad de los Andes, Colombia - Department of Economics

Date Written: March 13, 2019

Abstract

Personalized medicine is still in its infancy, with costly genetic tests providing Little actionable information in terms of efficient prevention decisions. As a consequence, few people undertake these tests currently, and health insurance contracts pool all agents irrespective of their genetic background. Cheaper and especially more informative tests will induce more people to undertake these tests and will impact not only the pricing but also the type of health insurance contracts. We develop a setting with endogenous prevention decisions and we study which contract type (pooling or separating) emerges at equilibrium as a function of the proportion of agents undertaking the genetic test as well as of the informativeness of this test.

Our results show that, ceteris paribus, the higher is the proportion of tested agents, the more likely is the emergence of a separating equilibrium that implies some risk discrimination. However, a better pooling contract in which policyholders undertake preventive actions (and lower their health risk) can be attained if the informativeness of the genetic tests increases sufficiently. Once the proportion of tested individuals reaches a threshold, we move abruptly from pooling to separating equilibrium, which unambiguously decreases social welfare. Once the equilibrium is of the separating type, social welfare increases with the genetic tests take-up rate, thanks to a composition effect.

Keywords: discrimination risk, informational value of test, personalized medecine, pooling and separating equilibria

JEL Classification: D82, I18

Suggested Citation

De Donder, Philippe and Bardey, David, Welfare Impacts of Genetic Testing in Health Insurance Markets: Will Cross-Subsidies Survive? (March 13, 2019). Documento CEDE No. 2019-13. Available at SSRN: https://ssrn.com/abstract=3410470 or http://dx.doi.org/10.2139/ssrn.3410470

Philippe De Donder (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

David Bardey

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

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