| |
|
Job Market Paper
Selection in Employer Health Plans: Homogeneous Prices and Heterogeneous Preferences
Analysts of health care policy have long been concerned that adverse selection distorts consumers' choices among health insurance options. Regulations that prohibit price discrimination on the basis of observable characteristics such as age, gender, or medical history can exacerbate adverse selection, but can also lead to another kind of inefficiency. I extend a standard selection model to show that if groups like men and women or young and old have systematically different preferences over insurance that are partly uncorrelated with their insurable risk, then uniform pricing can induce inefficient self-sorting into plans that cannot be corrected by the standard remedies for adverse selection. To assess the empirical relevance of the model, I analyze administrative health claims from a large US employer, and show a previously undocumented pattern of selection: Demand for more complete health insurance increases dramatically in age, even after controlling for expected healthcare expenditures. I estimate a structural model of plan choice to quantify the efficiency gains that would result if pricing were allowed to vary with age. The results indicate that the welfare gains from introducing even minimal-information age-adjusted prices are similar in magnitude to recent estimates of the welfare gains from perfectly correcting adverse selection under uniform prices in employer health plans.
All Other Research
|
