TY - JOUR AU - Cutler, David M AU - Zeckhauser, Richard J TI - Adverse Selection in Health Insurance JF - National Bureau of Economic Research Working Paper Series VL - No. 6107 PY - 1997 Y2 - July 1997 DO - 10.3386/w6107 UR - http://www.nber.org/papers/w6107 L1 - http://www.nber.org/papers/w6107.pdf N1 - Author contact info: David M. Cutler Department of Economics Harvard University 1875 Cambridge Street Cambridge, MA 02138 Tel: 617/496-5216 Fax: 617/496-8951 E-Mail: dcutler@harvard.edu Richard J. Zeckhauser John F. Kennedy School of Government Harvard University 79 John F. Kennedy Street Cambridge, MA 02138 Tel: 617/495-1174 Fax: 617/384-9340 E-Mail: richard_zeckhauser@harvard.edu M1 - published as David M. Cutler, Richard J. Zeckhauser. "Adverse Selection in Health Insurance," in Alan M. Garber, editor, "Frontiers in Health Policy Research, Volume 1" MIT Press (1998) AB - Individual choice over health insurance policies may result in risk-based sorting across plans. Such adverse selection induces three types of losses: efficiency losses from individuals being allocated to the wrong plans; risk sharing losses since premium variability is increased; and losses from insurers distorting their policies to improve their mix of insureds. We discuss the potential for these losses, and present empirical evidence on adverse selection in two groups of employees: Harvard University, and the Group Insurance Commission of Massachusetts (serving state and local employees). In both groups, adverse selection is a significant concern. At Harvard, the University's decision to contribute an equal amount to all insurance plans led to the disappearance of the most generous policy within 3 years. At the GIC, adverse selection has been contained by subsidizing premiums on a proportional basis and managing the most generous policy very tightly. A combination of prospective or retrospective risk adjustment, coupled with reinsurance for high cost cases, seems promising as a way to provide appropriate incentives for enrollees and to reduce losses from adverse selection. ER -