TY - JOUR AU - Cebul, Randall D AU - Rebitzer, James B AU - Taylor, Lowell J AU - Votruba, Mark E TI - Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance JF - National Bureau of Economic Research Working Paper Series VL - No. 14455 PY - 2008 Y2 - October 2008 DO - 10.3386/w14455 UR - http://www.nber.org/papers/w14455 L1 - http://www.nber.org/papers/w14455.pdf N1 - Author contact info: Randall Cebul Professor of Medicine, Epidemiology, and Biostatistics Director, Center for Health Care Research & Policy School of Medicine Case Western Reserve University E-Mail: rdc@case.edu James B. Rebitzer Professor of Management, Economics, Public Policy Markets, Public Policy and Law Department Boston University School of Management 595 Commonwealth Ave. Boston, MA 02215 Tel: 617-383-7356 Fax: NA E-Mail: rebitzer@bu.edu Lowell Taylor Carnegie Mellon University H. John Heinz III College 5000 Forbes Avenue Pittsburgh, PA 15213 Tel: 412/268-3278 E-Mail: lt20@andrew.cmu.edu Mark Votruba Weatherhead School of Management Case Western Reserve University 11119 Bellflower Road Cleveland, OH 44106 Tel: 216-368-4296 Fax: 216-368-5039 E-Mail: mark.votruba@case.edu AB - We analyze the role of search frictions in the market for commercial health insurance. Frictions increase the cost of insurance by enabling insurers to set price above marginal cost, and by creating incentives for inefficiently high levels of marketing. Frictions also lead to price dispersion for identical products and, as a consequence, to increases in the rate of insurance turnover. Our empirical analysis indicates that frictions increase prices enough to transfer 13.2% of consumer surplus from employer groups to insurers (approximately $34.4 billion in 1997), and increase employer group turnover by 64% for the average insurance policy. This heightened turnover reduces insurer incentives to invest in the future health of their policy holders. Our analysis also suggests that a publicly-financed insurance option might improve private insurance markets by reducing distortions induced by search frictions. ER -