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Title: Reclassification Risk in the Small Group Health Insurance Market

Author(s): Sebastian Fleitas, Gautam Gowrisankaran and Anthony Lo Sasso

Publication Date: February 2020

Keyword(s): Adverse Selection, experience rating, guaranteed renewability, inertia and Pass through

Programme Area(s): Industrial Organization

Abstract: We evaluate reclassification risk in the small group health insurance market from a period before ACA community rating regulations. Reclassification risk in this setting is of key policy relevance and also a matter of debate. We use detailed claims and premiums data from a large insurance company and control non-parametrically for selection. We find a pass through of 16% from changes in health risk to changes in premiums, with a stronger equilibrium relationship between premiums and risk. This pattern is consistent with the insurer implicitly offering "guaranteed renewability'' contracts with one-sided pricing commitment. We further find that groups whose health risk decreases have premiums that are more responsive to risk, which the guaranteed renewability model attributes to ex post renegotiation. The observed pricing policy adds 60% of the consumer welfare gain from community rating relative to experience rating. The welfare gains are limited because employers and employees switch coverage frequently.

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Bibliographic Reference

Fleitas, S, Gowrisankaran, G and Lo Sasso, A. 2020. 'Reclassification Risk in the Small Group Health Insurance Market'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14394