Advertising and Risk Selection in Health Insurance Markets
American Economic Review · 2018 · Volume 108 · Issue 3
Abstract
This paper studies the impact of advertising as a channel for risk selection in Medicare Advantage. We provide evidence that insurer advertising is responsive to the gains from risk selection. Then we develop and estimate an equilibrium model of Medicare Advantage with advertising, allowing rich individual heterogeneity. Our estimates show that advertising is effective in attracting healthy individuals who are newly eligible for Medicare, contributing to advantageous selection into Medicare Advantage. Moreover, risk selection through advertising substantially lowers premiums by improving insurers' risk pools. The distributional implication is that unhealthy consumers may be better off through cross-subsidization from healthy individuals.
Keywords
Criteria for Decision-Making under Risk and Uncertainty, Insurance, Insurance Companies, Actuarial Studies, Health Insurance, Public and Private, Health: Government Policy, Regulation, Public Health, Advertising
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