Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets

Benjamin R. Handel, Jonathan T. Kolstad and Johannes Spinnewijn

CEP Discussion Papers from Centre for Economic Performance, LSE

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.

Keywords: Information frictions; adverse selection; policy interventions (search for similar items in EconPapers)
JEL-codes: D80 I13 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-hea and nep-ias
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Citations: View citations in EconPapers (20)

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https://cep.lse.ac.uk/pubs/download/dp1390.pdf (application/pdf)

Related works:
Journal Article: Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets (2019)
Working Paper: Information frictions and adverse selection: policy interventions in health insurance markets (2018)
Working Paper: Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets (2015)
Working Paper: Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets (2015)
Working Paper: Information frictions and adverse selection: policyinterventions in health insurance markets (2015)
Working Paper: Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp1390

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