Adverse Selection
A central friction in health insurance markets is adverse selection, which arises when consumers with different expected healthcare costs sort into different insurance plans. When higher-risk individuals disproportionately enroll in more generous coverage, insurers may face average costs that exceed premiums, leading to premium increases, market unraveling, or the withdrawal of plans altogether. A large literature studies how adverse selection affects pricing, plan offerings, and equilibrium outcomes in health insurance markets, as well as how institutional features and policy interventions can mitigate or exacerbate these forces.
One strand of this literature focuses on pricing and the empirical detection of adverse selection. These papers develop and apply empirical tools to test for selection by examining the relationship between premiums, plan characteristics, and realized costs. Early and influential work shows how pricing patterns and enrollment responses can reveal the presence and magnitude of adverse selection in real-world insurance markets, providing a foundation for much of the modern empirical literature (Bundorf, Levin, and Mahoney (2012); Einav, Finkelstein, and Cullen (2010)).
A second strand examines policy interventions aimed at mitigating adverse selection, such as mandates, subsidies, and choice architecture. This work emphasizes that while such policies can improve market stability, they may also generate unintended consequences depending on how consumers respond and how insurers adjust plan design. A series of papers demonstrates that the effectiveness of these interventions depends critically on consumer inertia, switching costs, and the interaction between policy design and market structure (B. R. Handel (2013); B. Handel, Hendel, and Whinston (2015); B. R. Handel, Kolstad, and Spinnewijn (2019)).
More recent work extends the analysis of adverse selection beyond premiums and benefits to consider insurance networks as a margin of selection. In this view, plan networks—particularly hospital networks—shape both consumer choice and insurer costs, introducing new channels through which adverse selection operates. Evidence from health insurance exchanges shows that network design can be used strategically to attract or deter certain types of enrollees, linking adverse selection to competition among providers and insurers in novel ways (Shepard (2022)).
Potential papers for presentation today include
- Einav, Finkelstein, and Cullen (2010) — empirical tests for selection using pricing and cost data
- B. R. Handel, Kolstad, and Spinnewijn (2019) — consumer inertia, policy interventions, and adverse selection
- Shepard (2022) — hospital networks as a channel for adverse selection