Should There Be Vertical Choice in Health Insurance Markets?
We study the welfare effects of offering choice over coverage levels—“vertical choice”—in regulated health insurance markets. We emphasize that heterogeneity in the efficient level of coverage is not sufficient to motivate choice. When premiums do not reflect individuals' costs, it may not be in consumers' best interest to select their efficient coverage level. We show that vertical choice is efficient only if consumers with higher willingness to pay for insurance have a higher efficient level of coverage. We investigate this condition empirically and find that as long as a minimum coverage level can be enforced, the welfare gains from vertical choice are either zero or economically small.
We are grateful to Vivek Bhattacharya, David Cutler, Leemore Dafny, David Dranove, Amy Finkelstein, Tal Gross, Igal Hendel, Gaston Illanes, Matthew Leisten, Matt Notowidigdo, Chris Ody, Rob Porter, Elena Prager, Mar Reguant, Bill Rogerson, Mark Shepard, Amanda Starc, Bob Town, Tom Wiseman, and Gabriel Ziegler, as well as to the co-editor, Liran Einav, and three anonymous referees for advice and suggestions that greatly benefited this research. We also thank many participants in seminars at Northwestern, Kellogg, BI Norwegian Business School, University of Chicago, Princeton, MIT, Washington University in St. Louis, Yale SOM, Rochester Simon, NYU, MIT Sloan, Chicago Booth, Wisconsin, UT Austin, NBER Summer Institute, and the 2018 ASHEcon Conference for helpful comments. Finally, we thank Jason Abaluck and Jon Gruber for access to the data and for their support of this research project. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Victoria R. Marone & Adrienne Sabety, 2022. "When Should There Be Vertical Choice in Health Insurance Markets?," American Economic Review, vol 112(1), pages 304-342.