American Economic Review: Vol. 102 No. 7 (December 2012)


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Pricing and Welfare in Health Plan Choice

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Bundorf, M. Kate, Jonathan Levin, and Neale Mahoney. 2012. "Pricing and Welfare in Health Plan Choice." American Economic Review, 102(7): 3214-48.

DOI: 10.1257/aer.102.7.3214


Premiums in health insurance markets frequently do not reflect individual differences in costs, either because consumers have private information or because prices are not risk rated. This creates inefficiencies when consumers self-select into plans. We develop a simple econometric model to study this problem and estimate it using data on small employers. We find a welfare loss of 2-11 percent of coverage costs compared to what is feasible with risk rating. Only about one-quarter of this is due to inefficiently chosen uniform contribution levels. We also investigate the reclassification risk created by risk rating individual incremental premiums, finding only a modest welfare cost. (JEL G22, I13, I18)

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Bundorf, M. Kate (Stanford U)
Levin, Jonathan (Stanford U)
Mahoney, Neale (Harvard U)

JEL Classifications

G22: Insurance; Insurance Companies
I13: Health Insurance, Public and Private
I18: Health: Government Policy; Regulation; Public Health

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