PAYING FOR HEALTH-INSURANCE - THE TRADE-OFF BETWEEN COMPETITION AND ADVERSE SELECTION

We use data on health plan choices by employees of Harvard University to compare the benefits of insurance competition with the costs of adv erse selection. Moving to a voucher-type system induced significant ad verse selection, with a welfare loss of 2 to 4 percent of baseline spe nding. But increased competition reduced Harvard's premiums by 5 to 8 percent. The premium reductions came from insurer profits, so while Ha rvard was better off, the net effect for society was only the adverse selection loss. Adverse selection can be minimized by adjusting vouche r amounts for individual risk. We discuss how such a system would work .