Adverse Selection and an Individual Mandate: When Theory Meets Practice

• Published in: The American economic review Vol. 105; no. 3; pp. 1030 - 1066
• Main Authors: Hackmann, Martin B., Kolstad, Jonathan T., Kowalski, Amanda E.
• Format: Journal Article
• Language: English
• Published: United States American Economic Association 01.03.2015
• Subjects: Adverse selection; Average cost; Economic analysis; Employers; Fines & penalties; Health care; Health care policy; Health Care Reform - economics; Health economics; Health insurance; Health technology assessment; Humans; Individual mandate; Insurance coverage; Insurance premiums; Insurance providers; Insurance Selection Bias; Insurance, Health - economics; Insurance, Health - statistics & numerical data; Mandatory Programs - economics; Mandatory Programs - statistics & numerical data; Markups; Massachusetts; Models, Theoretical; Patient Protection and Affordable Care Act; Public assistance programs; Reforms; Social security; Social Welfare; Studies; Tax penalties; Taxes; U.S.A; United States; United States > US
• ISSN: 0002-8282; 1944-7981
• DOI: 10.1257/aer.20130758

We develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. Using data from Massachusetts, we estimate the parameters of the model. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate. We find an annual welfare gain of 4.1 percent per person or $51.1 million annually in Massachusetts as a result of the reduction in adverse selection. We also find smaller post-reform markups.