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Wednesday, August 4 • 9:00am - 10:30am
6C3 Is Affordable Care too Affordable?

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Afrasiab Mirza, University of Birmingham; Mike Hoy, University of Guelph; Eric Stephens, Carleton University

We examine the efficiency of private individual health insurance contracts in a dynamic general equilibrium environment in the presence of two key frictions: 1) individuals can not commit to long-term contracts, and 2) illness severity is not observable. We show that the latter leads to a standard ex-post moral hazard friction that impinges on the ability of guaranteed renewable contracts to insure individuals against re-classification risk. Furthermore, we identify a pecuniary externality that arises from individuals failing to account for the effect their insurance purchases have on the price of care in the future. As a result, the equilibrium is constrained inefficient, and characterized by excessive insurance purchases by individuals ex-ante, and over-consumption of medical care ex-post resulting in a bubble for the price of care. Paradoxically, policies that enforce a minimum co-pay are welfare enhancing even as they limit insurance against re-classification and illness.

avatar for Xiao HAN

Xiao HAN

PhD Candidate, School of Economics, Peking University
Xiao Han is a PhD candidate from School of Economics, Peking University of China. Her research focuses on health insurance, long-term care insurance, and retirement financial products. She completed her bachelor's degree in Astronomy from School of Physics, Peking University.


Afrasiab Mirza

University of Birmingham

Mike Hoy

Professor, University of Guelph

Wednesday August 4, 2021 9:00am - 10:30am EDT