The Welfare Effects of Long-Term Health Insurance Contracts

64 Pages Posted: 3 Jan 2020

See all articles by Soheil Ghili

Soheil Ghili

Yale University

Benjamin Handel

University of California, Berkeley

Igal Hendel

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Michael D. Whinston

Sloan School of Management and Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2019

Abstract

Reclassification risk is a major concern in health insurance where contracts are typically one year in length but health shocks often persist for much longer. We use rich individual-level medical information from the Utah all-payer claims database to empirically study one possible solution: long-term insurance contracts. We characterize optimal long-term contracts with one-sided commitment theoretically, derive the contracts that are optimal for consumers in Utah, and assess the welfare level that a full implementation of these contracts could achieve relative to several key benchmarks. We find that dynamic contracts perform very well for the majority of the population, for example, eliminating over 94% of the welfare loss from reclassification risk for individuals who arrive on the market at age 25 in good health. However, dynamic contracts instead provide very little benefit to the worst pre-age-25 health risks. Their value is also substantially lower for consumers whose income growth with age is relatively high. With pre-age-25 insurance in place, consumers with flat net income prefer dynamic contracts to an ACA-like environment, but consumers with steeper income profiles prefer the ACA-like environment. Overall, we show that there are scenarios in which dynamic contracts can provide substantial welfare benefits, but that complementary policies are crucial for unlocking these benefits.

JEL Classification: L5, I1, D0

Suggested Citation

Ghili, Soheil and Handel, Benjamin and Hendel, Igal E. and Whinston, Michael D., The Welfare Effects of Long-Term Health Insurance Contracts (December 31, 2019). Cowles Foundation Discussion Paper No. 2218, December 2019, Available at SSRN: https://ssrn.com/abstract=3513068 or http://dx.doi.org/10.2139/ssrn.3513068

Soheil Ghili (Contact Author)

Yale University ( email )

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Benjamin Handel

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
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Igal E. Hendel

Northwestern University - Department of Economics ( email )

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Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Michael D. Whinston

Sloan School of Management and Department of Economics ( email )

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Cambridge, MA 02142
United States

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