Pricing Regulations in Individual Health Insurance: Evidence from Medigap

In individual health insurance markets, consumers wish to insure long-term risks but may only buy one-year contracts. In the market for Medicare supplemental insurance (“Medigap”), states have adopted two regulatory solutions: (1) to prohibit price discrimination, and (2) to effectively create long-term contracts: the regulator establishes an initial open enrollment period and guarantees renewal at the same price offered to all other renewers. This paper is the first to leverage individual-level panel data on the entire Medigap market. I compare consumers living within 25 miles of a regulatory boundary, who are observationally equivalent but experience different pricing regulations. I find that insurance take-up is substantially higher under initial open enrollment with guaranteed renewal. When price discrimination is prohibited, insurance take-up drops by 9 percentage points (28 percent) and new Medigap buyers have insurer costs that are $138 (9 percent) higher per year. I find that when initial open enrollment with guaranteed renewal is in place, insurance take-up is higher for healthy and sick consumers alike. Prohibiting price discrimination eliminates the incentive for consumers to buy Medigap prior to the onset of chronic health conditions. The results suggest that initial open enrollment with guaranteed renewal may be a viable alternative to prohibiting price discrimination, a pricing regulation recently adopted in the exchanges established by the Affordable Care Act.