When Should There Be Vertical Choice in Health Insurance Markets?
American Economic Review
vol. 112,
no. 1, January 2022
(pp. 304-42)
Abstract
We study the welfare effects of offering choice over coverage levels—"vertical choice"—in regulated health insurance markets. We emphasize that heterogeneity in efficient coverage level is not sufficient to motivate choice. When premiums cannot reflect individuals' costs, it may not be in consumers' best interest to select their efficient coverage level. We show that vertical choice is efficient only if consumers with higher willingness to pay have a higher efficient level of coverage. We investigate this condition empirically and find that as long as a minimum coverage level can be enforced, the welfare gains from vertical choice are either zero or economically small.Citation
Marone, Victoria R., and Adrienne Sabety. 2022. "When Should There Be Vertical Choice in Health Insurance Markets?" American Economic Review, 112 (1): 304-42. DOI: 10.1257/aer.20201073Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- G22 Insurance; Insurance Companies; Actuarial Studies
- H75 State and Local Government: Health; Education; Welfare; Public Pensions
- I13 Health Insurance, Public and Private
- I21 Analysis of Education