When Should There Be Vertical Choice in Health Insurance Markets?
Victoria R. Marone, Adrienne Sabety
American Economic Review · 2022 · Volume 112 · Issue 1
Abstract
We study the welfare effects of offering choice over coverage levels—"vertical choice"—in regulated health insurance markets. We emphasize that heterogeneity in efficient coverage level is not sufficient to motivate choice. When premiums cannot reflect individuals' costs, it may not be in consumers' best interest to select their efficient coverage level. We show that vertical choice is efficient only if consumers with higher willingness to pay have a higher efficient level of coverage. We investigate this condition empirically and find that as long as a minimum coverage level can be enforced, the welfare gains from vertical choice are either zero or economically small.
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, Analysis of Education
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