Reclassification Risk in the Small Group Health Insurance Market
We evaluate health insurance reclassification risk in the Small Group Market from a period before ACA community rating regulations. Reclassification risk in this setting is of key policy relevance and also a matter of debate. We use detailed claims and premiums data from a large insurance company and control non-parametrically for selection. We find a pass-through of 16% from changes in health risk to changes in premiums, with a stronger equilibrium relationship between premiums and risk. This pattern is consistent with the insurer implicitly offering “guaranteed renewability” contracts with one-sided pricing commitment. We further find that groups whose health risk decreases have premiums that are more responsive to risk, which the guaranteed renewability model attributes to ex-post renegotiation. The observed pricing policy adds 55% of the consumer welfare gain from community rating relative to experience rating. The welfare gains are limited because employers and employees switch coverage frequently.
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