reports

Adverse selection, welfare and the optimal pricing of employer-sponsored health plans

St. Paul, MN, USA: University of Minnesota and NBER.

University of Minnesota, St. Paul, MN, USA

We assess the welfare impact of adverse selection in health insurance choices using detailed panel data on health plan choices and complete health care utilization. Our estimates suggest that adverse selection plays an important role in explaining cost differentials across plans and much of the selection occurs along difficult to contract upon dimensions. The distortionary consequences of the asymmetric information are modest because individuals are very premium inelastic in our data. Our findings show that the presence of significant adverse selection need not cause meaningful welfare loss.