Essays on Individual Health Insurance Market: Adverse Selection, Subsidy Design and Provision

Hongyu Zhang, University of Pennsylvania


Subsidies are important policy tools against market failure in public health insurance programs. With the presence of adverse selection, subsidies of various forms encourage insurance purchase by low-risk consumers and promote insurance coverage towards the socially optimal level. In the context of the U.S. individual health insurance market, however, little evidence quantifies the degree of adverse selection. Neither is there evidence about how consumers value the subsidies, nor the overall welfare impact of subsidy provisions. This dissertation studies the social welfare implications of subsidy provision in the individual insurance market. I first quantify the degree of intensive margin adverse selection presented in the Affordable Care Act (ACA) Health Insurance Marketplaces (the exchanges). Using a novel dataset from a major U.S. insurer, I compare care utilization by individual market enrollees with respect to coverage level with enrollees in the commercial small group market. The coverage provision and consumer health status in the latter are the most comparable to those in the individual market, and coverage choices are plausibly exogenous. I present evidence of intensive adverse selection in the exchanges. I then study the design and empirical implication of price-linked subsidies. I develop a theoretical model to illustrate how the pass-through from cost shocks to subsidy payments depends on adverse selection and competition. Then combining individual-level enrollment data from the California exchange with the novel claims data, I quantify the pass-through in the exchanges. Lastly, I estimate the value of providing the Cost-Sharing Reduction subsidy—a subsidy that increases coverage benefits—and compare the welfare consequences of this subsidy’s alternative financing strategies. I find that removing the Cost-Sharing Reduction subsidy will discourage enrollees in the lowest five percentile of health risk from obtaining insurance in the individual insurance market; consequently, premiums will increase by 5%-10%. Financing of the Cost-Sharing Reduction affects insurers’ incentive to participate in the market and, hence, total social surplus. Providing Cost-Sharing Reduction under the federal budget generates the highest total social surplus and achieves the highest return on public spending.

Subject Area

Economics|Health care management|Public policy

Recommended Citation

Zhang, Hongyu, "Essays on Individual Health Insurance Market: Adverse Selection, Subsidy Design and Provision" (2021). Dissertations available from ProQuest. AAI28417583.