Becker Friedman Institute

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Pricing and Welfare in Health Plan Choice

Premiums in 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 study this problem in health insurance markets. We develop a simple model and estimate it using data on small employers. In this setting, the welfare loss compared to the feasible risk-rated benchmark is around 2-11% of coverage costs. Three-quarters of this is due to restrictions on risk-rating employee contributions; the rest is due to inefficient contribution choices. Despite the inefficiency, we find substantial benefits from plan choice.

Jonathan Levin, Stanford University
M. Kate Bundorf, Stanford University
Neale Mahoney, University of Chicago
Publication Date: 
April, 2010
Publication Status: