essays in public finance and industrial organization a dissertation ...

Chapter 2
Pricing and Welfare in Health Plan
Choice
with M. Kate Bundorf and Jonathan Levin
2.1 Introduction
Whether competition in health insurance markets leads to efficient outcomes is a
central question for health policy. Markets are effective when prices direct consumers
and firms to behave efficiently. But in health insurance markets, prices often do
not reflect the different costs of coverage for different enrollees. This generates two
concerns. If insurers receive premiums that do not reflect enrollee risk, they have an
incentive to engage in risk selection through plan design (??). Similarly, if consumers
face prices that do not reflect cost differences across plans, they may select coverage
inefficiently (??). While it is widely recognized that these problems may impair the
efficiency of competitive health insurance markets, evidence on their quantitative
importance for social welfare is limited.
In the U.S. private market, employers generally contract with insurers to cre-
ate a menu of plans from which employees select coverage. The government or a
quasi-public organization plays a similar role in the U.S. Medicare program and the
national systems of Germany and the Netherlands. To address incentive problems in
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