Long-Term Health Insurance: Theory Meets Evidence
To insure policyholders against contemporaneous health expenditure shocks and future reclassification risk, long-term health insurance constitutes an alternative to community-rated short-term contracts with an individual mandate. Relying on unique claims panel data from a large private insurer in Germany, we study a real-world long-term health insurance application with a life-cycle perspective. We show that German long-term health insurance (GLTHI) achieves substantial welfare gains compared to a series of risk-rated short-term contracts. Although, by its simple design, the premium setting of GLTHI contract departs significantly from the optimal dynamic contract, surprisingly we only find modest welfare differences between the two. Finally, we conduct counterfactual policy experiments to illustrate the welfare consequences of integrating GLTHI into a system with a “Medicare-like” public insurance that covers people above 65.
We thank Konstantin Beck, Paola Bertoli, Rudi Blankert, Florian Buchner, Keith Ericson, Colleen Carey, David Dillenberger, Stefan Felder, Sebastian Fleitas, Leora Friedberg, Paul Grieco, Kate Ho, Mathias Kifmann, Amanda Kowalski, Ethan Lieber, Tony Lo Sasso, Claudio Lucarelli, Maria Polyakova, Andreas Ryll, Holger Strulik, Nicholas Tilipman, Jürgen Wasem, Michael Whinston, Joachim Winter, Moto Yogo, and Peter Zweifel as well as seminar participants at Lund University, Princeton University, University of Wisconsin-Madison, Conference of the American Society of Health Economists (2018), Annual Meeting of the Southern Economic Association (2018), Health Economics Working Group Meeting of the German Economic Association (Ausschuss für Gesundheitsökonomie, 2018), Essen Health Conference (2019), Congress of the International Health Economics Association (iHEA, 2019), NBER Insurance Working Group Conference (Spring 2019), New York Area Health Economics Day (2019), and the GSE Forum in Microeconometrics for very helpful comments and suggestions. We thank representatives of the German Association of Private Health Insurers as well as Frank Bowert for invaluable comments on how well our modeling of German LTHI reflects actuarial practices. We do not have financial interests that would constitute any conflict of interests with this research. Generous funding by the German Federal Ministry of Education and Research (FKZ: 01EH1602A) is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.