We study how increasing contract length affects adverse selection in health insurance markets. While health risks are persistent, private health insurance contracts in the U.S. have short, one-year terms. Short-term, community-rated contracts allow patients to increase their coverage only after risks materialize, leading to market unraveling. Longer contracts ameliorate adverse selection because both demand and supply exhibit horizon effects. Intuitively, longer horizon risk is less predictable, thus elevating demand for coverage and lowering equilibrium premiums. We estimate risk dynamics using data from 3.5 million U.S. health insurance claims and calculate counterfactual coverage and welfare in equilibrium with two-year contracts. We predict that such contracts would increase coverage by 6% from its initial level and yield average annual welfare gains of $100–$200 per person. Welfare gains from increased enrollment would partly offset by exposing those with low coverage to greater risk.
Darmouni, Olivier, and Dan Zeltzer. "Horizon Effects and Adverse Selection in Health Insurance Markets." Columbia Business School, February 14, 2017.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.