Advertising and Risk Selection in Health Insurance Markets

Aizawa, Naoki; Kim, You Suk

doi:10.17016/FEDS.2015.101

Working Paper

Advertising and Risk Selection in Health Insurance Markets

Abstract: We study impacts of advertising as a channel of risk selection in Medicare Advantage. We show evidence that both mass and direct mail advertising are targeted to achieve risk selection. We develop and estimate an equilibrium model of Medicare Advantage with advertising to understand its equilibrium impacts. We find that advertising attracts the healthy more than the unhealthy. Moreover, shutting down advertising increases premiums by up to 40% for insurers that advertised by worsening their risk pools, which further reduces the demand of the unhealthy. We argue that risk selection may make consumers better off by improving insurers' risk pools.

Keywords: Advertising; Health insurance; Medicare; Risk selection;

https://doi.org/10.17016/FEDS.2015.101