TY - JOUR AU - Herring,Bradley AU - Pauly,Mark TI - Incentive-Compatible Guaranteed Renewable Health Insurance JF - National Bureau of Economic Research Working Paper Series VL - No. 9888 PY - 2003 Y2 - August 2003 UR - http://www.nber.org/papers/w9888 L1 - http://www.nber.org/papers/w9888.pdf N1 - Author contact info: Bradley Herring Department of Health Policy & Management Bloomberg School of Public Health Johns Hopkins University 624 North Broadway, HH #408 Baltimore, MD 21215 Tel: 410-614-5967 Fax: 410-955-6959 E-Mail: bherring@jhsph.edu Mark Pauly Health Care Management Department The Wharton School University of Pennsylvania 208 Colonial Penn Center 3641 Locust Walk Philadelphia, PA 19104-6218 E-Mail: pauly@wharton.upenn.edu AB - Multi-period theoretical models of renewable insurance display front-loaded premium schedules that both cover lifetime total claims of low-risk and high-risk individuals and provide an incentive for those who remain low-risk to continue to purchase the policy. In practice, however, an age profile of premiums that decreases with age might result in relatively high premiums for younger individuals which they may consider unaffordable. In this paper, we use medical expenditure data to estimate an optimal competitive age-based premium schedule for a benchmark renewable health insurance policy. We find that the amount of prepayment by younger individuals that would be necessary to cover future claims is mitigated by three factors: high-risk individuals will either recover or die, low-risk expected expense increases with age, and the likelihood of developing a high-risk condition increases with age. Although medical cost growth over time increases the amount of prepayment necessary, the resulting optimal premium path generally increases with age. We also find that actual premium paths exhibited by purchasers of individual insurance with guaranteed renewability is close to the optimal schedule we estimate. Finally, we examine consumers' gain in expected utility associated with the guaranteed renewability feature. ER -