Death Spiral or Euthanasia? The Demise of Generous Group Health Insurance Coverage

26 Pages Posted: 18 May 2004 Last revised: 6 Aug 2010

See all articles by Mark V. Pauly

Mark V. Pauly

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

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Yuhui Zeng

University of Pennsylvania - Health Care Systems Department

Date Written: May 2004

Abstract

Employers must determine which sorts of healthcare insurance plans to offer employees and also set employee premiums for each plan provided. Depending on how they structure the premiums that employees pay across different healthcare insurance plans, plan sponsors alter the incentives to choose one plan over another. If employees know they differ by risk level but premiums do not fully reflect these risk differences, this can give rise to a so-called "death spiral" due to adverse selection. In this paper use longitudinal information from a natural experiment in the management of health benefits for a large employer to explore the impact of moving from a fixed dollar contribution policy to a risk-adjusted employer contribution policy. Our results suggest that implementing a significant risk adjustment had no discernable effect on adverse selection against the most generous indemnity insurance policy. This stands in stark contrast to previous studies, which have tended to find large impacts. Further analysis suggests that previous studies which appeared to detect plans in the throes of a death spiral, may instead have been experiencing an inexorable movement away from a non-preferred product, one that would have been inefficient for almost all workers even in the absence of adverse selection.

Suggested Citation

Pauly, Mark V. and Mitchell, Olivia S. and Zeng, Yuhui, Death Spiral or Euthanasia? The Demise of Generous Group Health Insurance Coverage (May 2004). NBER Working Paper No. w10464. Available at SSRN: https://ssrn.com/abstract=541681

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

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yuhui Zeng

University of Pennsylvania - Health Care Systems Department ( email )

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

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