Access to coverage for high-risks in a competitive individual health insurance market: via premium rate restrictions or risk-adjusted premium subsidies? (original) (raw)
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Journal of Health Economics, 1999
The tax subsidy for employment-related health insurance can lead to excessive coverage and excessive spending on medical care. Yet, the potential also exists for adverse selection to result in the opposite problem-insufficient coverage and underconsumption of medical Ž. care. This paper uses the model of Rothschild and Stiglitz R-S to show that a simple linear premium subsidy can correct market failure due to adverse selection. The optimal linear subsidy balances welfare losses from excessive coverage against welfare gains from reduced adverse selection. Indeed, a capped premium subsidy may mitigate adverse selection without creating incentives for excessive coverage. Published by Elsevier Science B.V.
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A standard test for adverse selection in health insurance examines whether people with characteristics predicting high health care utilization are more likely to buy insurance (or buy more generous insurance). George Akerlof's theory of adverse selection suggests a test based on prices: those who purchase insurance at the regular price will have higher expected utilization than those buying insurance when offered a deeply discounted price. Both tests provide (different) lower bounds on self-selection. We use a randomly allocated coupon for deeply discounted health insurance in rural Cambodia coupled with a longitudinal survey to test for adverse selection. While the standard test can show only a small amount of self-selection, the Prices test shows vastly more self-selection-providing a much more informative lower bound.
Health affairs (Project Hope), 2012
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We study the consequences of imposing a minimum coverage in an insurance market where enrollment is mandatory and agents have private information on their true risk type. If the regulation is not too stringent, the equilibrium is separating in which a single insurer monopolizes the high risks while the rest attract the low risks, all at positive profits. Hence individuals, regardless of their type, "subsidize" insurers. The authors thank Ramon Caminal and Mathias Kifmann, who discussed an earlier version of the paper. We are indebted to Francesco Decarolis for invaluable help with Medicare Part D data. We also thank the participants in the Workshop in Game Theory of the Department of Economics at UAB, the Industrial
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