When Should There Be Vertical Choice in Health Insurance Markets?
95 Pages Posted: 19 Mar 2021
Date Written: March 18, 2021
We study the welfare effects of offering choice over coverage levels––“vertical choice”––in regulated health insurance markets. Though the efficient level of coverage, which trades off the value of risk protection and the social cost from moral hazard, likely varies across consumers, we emphasize that this variation alone is not sufficient to motivate choice. We show that vertical choice is efficient only if consumers with higher willingness to pay for insurance have a higher efficient level of coverage. Using administrative data from a large employer, we find that the welfare gains from vertical choice are either zero or economically small.
Keywords: risk protection, moral hazard, health insurance
JEL Classification: J82, G22, I13
Suggested Citation: Suggested Citation