Hosted by Professor: Elena Manresa- firstname.lastname@example.org
Choice over coverage level––“vertical choice”––is widely available in U.S. health insurance markets, but there is limited evidence of its effect on welfare. The socially efficient level of coverage for a given consumer optimally trades off the value of risk protection and the social cost from moral hazard. Providing choice does not necessarily lead consumers to select their efficient coverage level. We show that in regulated competitive health insurance markets, vertical choice should be offered only if consumers with higher willingness to pay for insurance have a higher efficient coverage level. We test for this condition empirically using administrative data from a large employer representing 45,000 households. We estimate a model of consumer demand for health insurance and health care utilization that incorporates heterogeneity in health, risk aversion, and moral hazard. Our estimates imply substantial heterogeneity in efficient coverage level, but we do not find that households with higher efficient coverage levels have higher willingness to pay. It is therefore optimal to offer only a single coverage level. Relative to a status quo with vertical choice, offering only the optimal single level of coverage increases welfare by $302 per household per year. This policy shift makes the 81 percent of households with the highest willingness to pay better off.