Adverse Selection, Welfare and the Optimal Pricing of Employer- Sponsored Health Plans

We assess the welfare impact of adverse selection in health insurance choices using detailed panel data on health plan choices and complete health care utilization. Our estimates suggest that adverse selection plays an important role in explaining cost differentials across plans and much of the selection occurs along difficult to contract upon dimensions. The distortionary consequences of the asymmetric information are modest because individuals are very premium inelastic in our data. Our findings show that the presence of significant adverse selection need not cause meaningful welfare loss. __________________ We have received helpful comments from seminar participants at International Health Economics Association Conference in Copenhagen, Cornell University, Northwestern University and the University of Minnesota. We thank Bryan Down, Roger Feldman, Thomas Holmes, Sam Kortum and Dean Lillard for their comments. Support provided by AHRQ Dissertation Grant HS015527.