The Welfare Effects of Long-Term Health Insurance Contracts
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.
We thank Neale Mahoney and Nathan Hendren, as well as seminar participants at Arizona, Bocconi, EIEF, Harvard, the MIT Public Finance lunch, the April 2017 NBER joint public finance/insurance conference, Penn, Princeton, Stanford, Toulouse, UCLA, UNC, and Washington University for their comments. All authors are grateful for support from NSF grant SES-1259770. We thank Soheil Ghili for outstanding research assistance. All authors are grateful for support from NSF grant SES-1259770. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.