Paying for Health Insurance: The Trade-Off between Competition and
Adverse Selection
Sarah J. Reber
May 1998
Abstract
We use data on health plan choices by employees of Harvard University to
compare the benefits of insurance competition with the costs of adverse selection.
Moving to a voucher-type system induced significant adverse selection, with a
welfare loss of 2 to 4 percent of baseline spending. But increased competition
reduced Harvard's premiums by 5 to 8 percent. The premium reductions came
from insurer profits, so while Harvard was better off, the net effect for society was
only the adverse selection loss. Adverse selection can be minimized by adjusting
voucher amounts for individual risk. We discuss how such a system would work.
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