Advertising and Risk Selection in Health Insurance Markets†

Advertising and Risk Selection in Health Insurance Markets† AbstractThis paper studies the impact of advertising as a channel for risk selection in Medicare Advantage. We provide evidence that insurer advertising is responsive to the gains from risk selection. Then we develop and estimate an equilibrium model of Medicare Advantage with advertising, allowing rich individual heterogeneity. Our estimates show that advertising is effective in attracting healthy individuals who are newly eligible for Medicare, contributing to advantageous selection into Medicare Advantage. Moreover, risk selection through advertising substantially lowers premiums by improving insurers' risk pools. The distributional implication is that unhealthy consumers may be better off through cross-subsidization from healthy individuals. (JEL D81, G22, I13, I18, M37) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Advertising and Risk Selection in Health Insurance Markets†

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Publisher
American Economic Association
Copyright
Copyright © 2018 © American Economic Association
ISSN
0002-8282
D.O.I.
10.1257/aer.20151485
Publisher site
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Abstract

AbstractThis paper studies the impact of advertising as a channel for risk selection in Medicare Advantage. We provide evidence that insurer advertising is responsive to the gains from risk selection. Then we develop and estimate an equilibrium model of Medicare Advantage with advertising, allowing rich individual heterogeneity. Our estimates show that advertising is effective in attracting healthy individuals who are newly eligible for Medicare, contributing to advantageous selection into Medicare Advantage. Moreover, risk selection through advertising substantially lowers premiums by improving insurers' risk pools. The distributional implication is that unhealthy consumers may be better off through cross-subsidization from healthy individuals. (JEL D81, G22, I13, I18, M37)

Journal

American Economic ReviewAmerican Economic Association

Published: Mar 1, 2018

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