Protecting Against Adverse Selection in Competitive Health Insurance Markets
Adverse selection is a common problem in competitive health insurance markets. It results in welfare losses due to insurers inefficiently rationing services that attract high cost patients and due to the inefficient pricing of insurance policies it causes. This is an especially important problem under the health reforms set out in the Affordable Care Act, where consumers purchase insurance in competitive marketplaces known as exchanges and insurers are only allowed to vary premiums according to a limited set of variables. While there are policies such as risk adjustment, reinsurance, and age-based premiums that are meant to address these adverse selection problems, little is known about how these policies affect welfare in equilibrium. This session includes important papers that (1) estimate the welfare consequences of risk adjustment and reinsurance in competitive health insurance markets, (2) estimate the welfare consequences of allowing premiums to vary by age, and (3) incorporate taste heterogeneity into risk adjustment models. The papers provide important information for policymakers who choose among a variety of policies to combat adverse selection problems. They also bridge the gap between the health policy literature and the economics literature by placing an emphasis on exploring the effects of these policies on welfare in a competitive equilibrium and incorporating individual incentives instead of focusing on the ability of a risk adjustment model to predict costs.