Researchers from University of California Berkeley Describe Findings in Economics (Optimal Long-term Health Insurance Contracts: Characterization, Computation, and Welfare Effects): Economics

2023 JUL 04 (NewsRx) -- By a News Reporter-Staff News Editor at Insurance Daily News -- Investigators discuss new findings in Economics. According to news reporting originating from Berkeley, California, by NewsRx correspondents, research stated, “Reclassification risk is a major concern in health insurance where contracts are typically 1 year in length but health shocks often persist for much longer. While most health systems with private insurers pair short-run contracts with substantial pricing regulations to reduce reclassification risk, long-term contracts with one-sided insurer commitment have significant potential to reduce reclassification risk without the negative side effects of price regulation, such as adverse selection.”

Financial support for this research came from National Science Foundation (NSF).

Our news editors obtained a quote from the research from the University of California Berkeley, “We theoretically characterize optimal long-term insurance contracts with one-sided commitment, extending the literature in directions necessary for studying health insurance markets. We leverage this characterization to provide a simple algorithm for computing optimal contracts from primitives. We estimate key market fundamentals using data on all under-65 privately insured consumers in Utah. We find that dynamic contracts are very effective at reducing reclassification risk for consumers who arrive at the market in good health, but they are ineffective for consumers who come to the market in bad health, demonstrating that there is a role for the government insurance of pre-market health risks. Individuals with steeply rising income profiles find front-loading costly, and thus relatively prefer ACA-type exchanges.”

According to the news editors, the research concluded: “Switching costs enhance, while myopia moderately compromises, the performance of dynamic contracts.”

This research has been peer-reviewed.

For more information on this research see: Optimal Long-term Health Insurance Contracts: Characterization, Computation, and Welfare Effects. The Review of Economic Studies, 2023. The Review of Economic Studies can be contacted at: Oxford Univ Press, Great Clarendon St, Oxford OX2 6DP, England.

The news editors report that additional information may be obtained by contacting Ben Handel, University of California Berkeley, Dept. of Economics, Berkeley, CA 94720, United States. Additional authors for this research include Soheil Ghili, Igal Hendel and Michael D. Whinston.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1093/restud/rdad054. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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