The Welfare Impact of Long-Term Health Insurance Contracts

Open to the Public
Nador u. 15
Quantum Room (101)
Monday, December 4, 2017 - 11:00am
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Monday, December 4, 2017 - 11:00am to 12:15pm

Reclassification risk is a major concern in health insurance. We use a rich dataset with individual-level information on health risk to empirically study one possible solution: dynamic contracts. Empirically, dynamic contracts with one-sided commitment substantially reduce the reclassification risk present with spot contracting, achieving close to the first-best for consumers with flat net income paths. Gains are smaller for consumers with net income growth, and these consumers prefer ACA-like community rating over dynamic contracts. However, lower risk aversion, sufficient switching costs, or government insurance of pre-age-25 health risks can raise welfare with dynamic contracts above the level in ACA-like markets.