Moral Hazard Induced Unraveling

66 Pages Posted: 10 Sep 2016 Last revised: 23 Mar 2023

See all articles by Cameron Ellis

Cameron Ellis

University of Iowa

Meghan Esson

University of Iowa

Eli Liebman

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Date Written: March 31, 2019

Abstract

We identify and quantify a new form of welfare loss in insurance markets. We show that moral hazard from means-tested, out-of-pocket subsidies combined with community rating mimics adverse selection and can unravel insurance markets. We show that this is occurring on the ACA exchanges, where out-of-pocket subsidies to low-income consumers lead to higher costs to insurers through moral hazard. Using exogenous variation in the number of highly subsidized enrollees on the ACA exchanges, we show that this moral hazard cost has led to higher premiums, which has lowered enrollment among the unsubsidized by 7\%. We estimate the welfare costs of this ``moral hazard induced unraveling'' to be around 25\% of the welfare loss from adverse selection.

Keywords: Affordable Care Act, Health Insurance, Moral Hazard, Unraveling

JEL Classification: I13, I18, I38, G22

Suggested Citation

Ellis, Cameron and Esson, Meghan and Liebman, Eli, Moral Hazard Induced Unraveling (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=2836866 or http://dx.doi.org/10.2139/ssrn.2836866

Cameron Ellis (Contact Author)

University of Iowa ( email )

Tippie College of Business
21 E Market st
Iowa City, IA 52246
United States

Meghan Esson

University of Iowa ( email )

Iowa City, IA 52242-1000
United States

Eli Liebman

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

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