Asymmetric Information and the Generosity of Employer-Sponsored Health Insurance∗

While obtaining health insurance through an employer is an effective means of pooling risk, employees information advantage over insurers threatens to induce inefficiency due to moral hazard and adverse selection. I use Medical Expenditure Panel Survey data from 1996 to 2001 for a national sample of employer-employee matches to determine whether moral hazard and adverse selection affect the employer-sponsored health insurance market. I find that more generous coverage leads to increased spending on medical care due to moral hazard in non-managed, but not managed care, plans. There is little evidence, by neither spending nor health measures, for adverse selection between plans of the same type, but employees who cover someone over the age of 50 or with a chronic condition are less likely to enroll in a managed care plan, consistent with adverse selection between plan types. These results suggest that health insurance reforms that increase the amount of private information in the individual and small employer insurance markets, making them more like the existing employer market, may not lead to spiraling premiums or the elimination of generous plans. DISCLAIMER: The research in this paper was conducted while the author was a Special Sworn Status researcher of the U.S. Census Bureau at the Michigan Census Research Data Center. Any opinions and conclusions expressed herein are those of the author and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed.