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Information frictions and adverse selection: policyinterventions in health insurance markets

Handel, Benjamin R., Kolstad, Jonathan T. and Spinnewijn, Johannes (2015) Information frictions and adverse selection: policyinterventions in health insurance markets. CEP Discussion Paper (1390). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

This paper develops and implements a general framework to study insurance market equilibrium and evaluate policy interventions in the presence of choice frictions. Friction-reducing policies can increase welfare by facilitating better matches between consumers and plans, but can decrease welfare by increasing the correlation between willingness-to-pay and costs, exacerbating adverse selection. We identify relationships between the underlying distributions of consumer (i) costs (ii) surplus from risk protection and (iii) choice frictions that determine whether friction-reducing policies will be on net welfare increasing or reducing. We extend the analysis to study how policies to improve consumer choices interact with the supply-side policy of risk-adjustment transfers and show that the effectiveness of the latter policy can have important implications for the effectiveness of the former. We implement the model empirically using proprietary data on insurance choices, utilization, and consumer information from a large firm. We leverage structural estimates from prior work with these data and highlight how the model's micro-foundations can be estimated in practice. In our specific setting, we find that friction-reducing policies exacerbate adverse selection, essentially leading to the market fully unravelling, and reduce welfare. Risk-adjustment transfers are complementary, substantially mitigating the negative impact of friction-reducing policies, but having little effect in their absence.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2015 The Author
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
I - Health, Education, and Welfare > I1 - Health
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 15 Jan 2016 09:27
Last Modified: 21 Sep 2019 23:24
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/65011

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