Should There Be Vertical Choice in Health Insurance Markets?
We study the welfare effects of offering choice over financial coverage levels––"vertical choice''––in regulated health insurance markets. Though the efficient level of coverage, which trades off the value of risk protection and the social cost from moral hazard, likely varies across consumers, we emphasize that this variation alone is not sufficient to motivate choice. When premiums cannot reflect individual costs, consumers may not 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. Using administrative data from a large public employer, we investigate this condition empirically and find that the welfare gains from vertical choice are either zero or economically small.
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