NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Welfare Effects of Long-Term Health Insurance Contracts

Benjamin R. Handel, Igal Hendel, Michael D. Whinston

NBER Working Paper No. 23624
Issued in July 2017
NBER Program(s):HC, IO, PE

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.

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Document Object Identifier (DOI): 10.3386/w23624

 
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