Managing Adverse Selection in Health Insurance Markets: Underinsurance vs. Underenrollment

Adverse selection in insurance markets may lead some consumers to underinsure or too few consumers to purchase insurance relative to the socially optimal level. I study whether government intervention can simultaneously mitigate underinsurance and underenrollment due to adverse selection. I show there is a tradeoff in addressing underinsurance and underenrollment that has important welfare implications. I then estimate a model of the California ACA insurance exchange using consumer-level data to quantify the welfare impact of risk adjustment and the individual mandate. I find (1) risk adjustment reduces underinsurance, but reduces enrollment and (2) the mandate increases enrollment, but increases underinsurance.