Advertising and Risk Selection in Health Insurance Markets

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. (JEL D81, G22, I13, I18, M37)

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Selection in Health Insurance Markets and Its Policy Remedies

The Journal of Economic Perspectives ◽

10.1257/jep.31.4.23 ◽

2017 ◽

Vol 31 (4) ◽

pp. 23-50 ◽

Cited By ~ 13

Author(s):

Michael Geruso ◽

Timothy J. Layton

Keyword(s):

Health Insurance ◽

State Level ◽

Decision Makers ◽

Insurance Markets ◽

Risk Selection ◽

Medicare Advantage ◽

Medium Term ◽

Health Insurance Markets ◽

The Common ◽

Care Costs

Selection (adverse or advantageous) is the central problem that inhibits the smooth, efficient functioning of competitive health insurance markets. Even—and perhaps especially—when consumers are well-informed decision makers and insurance markets are highly competitive and offer choice, such markets may function inefficiently due to risk selection. Selection can cause markets to unravel with skyrocketing premiums and can cause consumers to be under- or overinsured. In its simplest form, adverse selection arises due to the tendency of those who expect to incur high health care costs in the future to be the most motivated purchasers. The costlier enrollees are more likely to become insured rather than to remain uninsured, and conditional on having health insurance, the costlier enrollees sort themselves to the more generous plans in the choice set. These dual problems represent the primary concerns for policymakers designing regulations for health insurance markets. In this essay, we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates. We emphasize the two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage (the private plan option available under Medicare) and the state-level individual insurance markets.

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Contending with Risk Selection in Health Insurance Markets in Germany

Perspektiven der Wirtschaftspolitik ◽

10.1111/j.1465-6493.2006.00217.x ◽

2006 ◽

Vol 7 (Supplement) ◽

pp. 75-91 ◽

Cited By ~ 2

Author(s):

Jacob Glazer ◽

Thomas G. McGuire

Keyword(s):

Health Insurance ◽

Risk Adjustment ◽

Simple Approach ◽

Insurance Markets ◽

Risk Selection ◽

Health Plans ◽

Health Insurance Markets ◽

The U.S

Abstract In many countries, competition among health plans or sickness funds raises issues of risk selection. Funds may discourage or encourage potential enrollees from joining, and these actions may have efficiency or fairness implications. This article reviews the experience in the U.S., and comments on the evidence for risk selection in Germany. There is little evidence that risk selection causes efficiency problems in Germany, but risk selection does lead to an inequality in contribution rates. A simple approach to equalizing contribution rates that does not involve risk adjustment is presented and discussed.

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