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Adverse selection and inertia in health insurance markets: when nudging hurts

Published: December 1, 2013
Category: Reports
Author: Handel BR
Country: United States
Language: null
Type: Finance/Budgeting
Settings: Academic, Health Plan

Am Econ Rev 103:2643-2682.

University of California, Berkeley, CA, USA

This paper investigates consumer inertia in health insurance markets, where adverse selection is a potential concern. We leverage a major change to insurance provision that occurred at a large firm to identify substantial inertia, and develop and estimate a choice model that also quantifies risk preferences and ex ante health risk. We use these estimates to study the impact of policies that nudge consumers toward better decisions by reducing inertia. When aggregated, these improved individual-level choices substantially exacerbate adverse selection in our setting, leading to an overall reduction in welfare that doubles the existing welfare loss from adverse selection.

Payment,Capitation,Population Markers,United States,Financial

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