Adverse Selection and an Individual Mandate: When Theory Meets Practice
Martin B. Hackmann, Jonathan T. Kolstad, Amanda E. Kowalski
American Economic Review · 2015 · Volume 105 · Issue 3
Abstract
We develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. Using data from Massachusetts, we estimate the parameters of the model. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate. We find an annual welfare gain of 4.1 percent per person or $51.1 million annually in Massachusetts as a result of the reduction in adverse selection. We also find smaller post-reform markups. (JEL D82, G22, H75, I13)
Keywords
Asymmetric and Private Information, Mechanism Design, Insurance, Insurance Companies, Actuarial Studies, State and Local Government: Health, Education, Welfare, Public Pensions, Health Insurance, Public and Private
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