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NBER: Intricacies and Implications of Adverse Selection in Health Insurance Choices

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In the complex domain of health insurance, adverse selection persistently surfaces as a critical issue, influencing pricing and product allocation among consumers. The research paper, “The Incidence of Adverse Selection: Theory and Evidence from Health Insurance Choices,” authored by Michael Geruso, Timothy Layton, and Adam Leive, meticulously explores the multifaceted implications of adverse selection, particularly its impact on pricing and product allocation among consumers, and its distributional consequences. Access the Original NBER working paper Here.

Navigating through the complex landscape of health insurance, the phenomenon of adverse selection consistently emerges as a pivotal concern, influencing both pricing and product allocation among consumers.

Adverse Selection: An In-depth Exploration

Adverse selection refers to a scenario where individuals with a higher risk are more likely to purchase insurance, thereby distorting prices upwards and potentially leading to market inefficiencies. This distortion not only affects the allocation of products but also has significant distributional consequences, particularly concerning who bears the burden of higher prices.

Theoretical Framework and Empirical Study

The researchers establish a theoretical framework that elucidates the incidence of adverse selection, focusing on whether the burden predominantly falls on high-income or low-income households. This is determined by the correlation between income, expected costs, and insurance demand. The empirical study, conducted within a large employer setting, reveals a notable gradient in insurance demand relative to income. Approximately 67% of employees with annual salaries over $120,000 opt for more generous health insurance plans, compared to only 44% of those earning below $35,000.

Distributional Incidence and Policy Implications

The paper underscores that the distributional incidence of adverse selection is often shouldered by higher-income consumers across various markets and income levels. This revelation brings forth a new perspective on adverse selection in social insurance programs, highlighting a potential efficiency-equity trade-off. While interventions like subsidies might mitigate the efficiency losses from adverse selection, they may inadvertently benefit higher-income groups disproportionately, thereby sparking crucial policy considerations.


The exploration of adverse selection in health insurance choices by Geruso, Layton, and Leive provides a nuanced understanding of the distributional consequences and policy implications of this economic phenomenon. The research underscores the necessity of considering both equity and efficiency in policy formulations, especially in the realm of health insurance, where the financial implications are deeply intertwined with societal well-being.

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