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Gautam Gowrisankaran (Arizona) – "Reclassification Risk in the Small Group Health Insurance Market"

May 17, 2019 @ 12:15 am - 1:30 pm

CREST Microeconomics Seminar : 

Time: 12:15 pm – 1:30pm
Date: 17th May 2019
Place: Room 3001.
Gautam Gowrisankaran (Arizona) – “Reclassification Risk in the Small Group Health Insurance Market”


We evaluate reclassification risk in the small group health insurance market from
a period before ACA community rating regulations. Using detailed individual-level
data from a large insurer, we find a pass through of 16% from health risk to premiums
with enrollee fixed effects, and 70% without fixed effects. The fixed effects estimates
identify the extent to which the insurer passes through changes in risk to changes in
premiums while the higher estimates without fixed effects may be due to more risk
rating for new accounts. Our estimates control for selection into insurance take-up
with a non-parametric selection model, using individual risk and industrial sector as
exclusion restrictions. Our results are also robust to other possibilities, including potential measurement error of risk scores and slow pass through over time. We seek
to explain why our fixed effects estimates are much closer to community rating than
full experience rating. The limited pass through may be due to implicit “guaranteed
renewability” contracts with one-sided pricing commitment on the part of the insurer,
as our results are broadly consistent with the equilibrium pass through that would
occur under these contracts. Our results cannot be explained by market power, search
frictions, or slow pass through over time. We simulate the value that is generated by
the insurer’s pricing policy relative to counterfactual pricing policies. The insurer’s
policy generates 60% of the welfare gain from community rating relative to full experience rating. Even community rated plans generate substantial reclassification risk
due to high out-of-pocket costs.

Roxana Fernandez Machado (CREST), Marie Laure Allain (CREST), and Linda Schilling (CREST)
Lunch registration:
food provided, no registration needed