Health Insurance on the Internet and the Economics of Search

29 Pages Posted: 25 Oct 2002 Last revised: 19 Sep 2014

See all articles by Mark V. Pauly

Mark V. Pauly

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

Bradley Herring

Emory University - Department of Health Policy and Management

David Song

University of Pennsylvania - Health Care Systems Department

Date Written: October 2002

Abstract

This paper explores the level and dispersion of premiums paid for individual health insurance by comparing asking price' data posted on an electronic insurance exchange with survey data on premiums actually paid in the period just before the advent of electronic exchanges. The primary theoretical question is whether the pattern of differences between asking prices and transactions prices can be explained using a simple search theory. We hypothesize, following suggestions of Stigler and Rothschild, that higher risks who expect to pay higher premiums for a given policy will engage in more intensive search than lower risks, given the same distribution of asking prices. As a result, for a given distribution of asking prices, the dispersion of premiums actually paid (transactions prices) will be smaller for higher risks. Therefore, the introduction of an electronic exchange should have a larger potential influence on the dispersion and level of premiums paid for lower risks than for higher risks. We find evidence consistent with each of these hypotheses.

Suggested Citation

Pauly, Mark V. and Herring, Bradley and Song, David, Health Insurance on the Internet and the Economics of Search (October 2002). NBER Working Paper No. w9299. Available at SSRN: https://ssrn.com/abstract=344883

Mark V. Pauly (Contact Author)

University of Pennsylvania - Health Care Systems Department ( email )

3641 Locust Walk
208 Colonial Penn Center
Philadelphia, PA 19104-6358
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Bradley Herring

Emory University - Department of Health Policy and Management ( email )

1518 Clifton Road NE
Atlanta, GA 30322
United States

David Song

University of Pennsylvania - Health Care Systems Department ( email )

3641 Locust Walk
Colonial Penn Center
Philadelphia, PA 19104-6358
United States

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