An Efficient Employer Strategy for Dealing with Adverse Selection in Multiple-Plan Offerings: An MSA Example

Journal of Health Economics
Vol. 19, No. 4
July 2000
Pauly, M.V. and B.J. Herring
pp. 513-28

This paper outlines a feasible employee premium contribution policy, which would reduce the inefficiency associated with adverse selection when a limited coverage insurance policy is offered alongside a more generous policy. The "efficient premium contribution" is defined and is shown to lead to an efficient allocation across plans of persons who differ by risk, but it may also redistribute against higher risks. A simulation of the additional option of a catastrophic health plan (CHP) accompanied by a medical savings account (MSA) is presented. The efficiency gains from adding the MSA/catastrophic health insurance plan (CHP) option are positive but small, and the adverse consequences for high risks under an efficient employee premium are also small.

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