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Welfare costs of reclassification risk in the health insurance market

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  • Pashchenko, Svetlana
  • Porapakkarm, Ponpoje

Abstract

We assess the quantitative importance of reclassification risk in the US health insurance market. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. Thus, a change in the health status can lead to a significant change in the health insurance premium. We measure welfare gains from introducing explicit insurance against this risk in the form of guaranteed renewable health insurance contracts. We find that in the current institutional environment individuals are well-sheltered against reclassification risk and they only moderately gain from having access to these contracts. More specifically, we show that employer-sponsored health insurance and public means-tested transfers play an important role in providing implicit insurance against reclassification risk. If these institutions are removed, the average welfare gains from having access to guaranteed renewable contracts exceed 4% of the annual consumption.

Suggested Citation

  • Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2015. "Welfare costs of reclassification risk in the health insurance market," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 21-44.
    • Handle: RePEc:eee:jmacro:v:45:y:2015:i:c:p:21-44
    DOI: 10.1016/j.jmacro.2015.04.003
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Reclassification risk in health insurance
      by Economic Logician in Economic Logic on 2012-01-18 21:28:00

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    Cited by:

    1. Svetlana Pashchenko & Ponpoje Porapakkarm, 2016. "Cross-Subsidization in Employer-Based Health Insurance and the Effects of Tax Subsidy Reform," National Tax Journal, National Tax Association;National Tax Journal, vol. 69(3), pages 583-612, September.
    2. Svetlana Pashchenko & Ponpoje (Poe) Porapakkarm & Mariacristina De Nardi, 2017. "The Lifetime Costs of Bad Health," 2017 Meeting Papers 533, Society for Economic Dynamics.
    3. James M. Carson & Cameron M. Ellis & Robert E. Hoyt & Krzysztof Ostaszewski, 2020. "Sunk Costs and Screening: Two‐Part Tariffs in Life Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(3), pages 689-718, September.
    4. Ferreira, Pedro Cavalcanti & Gomes, Diego B.P., 2017. "Health care reform or more affordable health care?," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 126-153.

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    More about this item

    Keywords

    Health insurance; Reclassification risk; Dynamic insurance; Guaranteed renewable contracts; General equilibrium;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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