Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance

Innovation and Economic Growth

Article Snapshot


Randall D. Cebul, James B. Rebitzer, Lowell J. Taylor and Mark E. Votruba


NBER Working Paper #14455, October 2008


When health insurers overcharge, costs increase and their incentives to invest in the health of their members diminish.

Policy Relevance

A well designed public option or insurance exchange will improve the efficiency of health insurance markets for small and medium sized employers.

Main Points

  • The difficulties in searching for health insurance increase the price of insurance enough to transfer $34.4 billion dollars per year (in 1997) from policy holders to insurers.

  • When comparison shopping is difficult, similar insurance policies can be sold for very different prices.  This overcharging increases insurance turnover by 64% for the average policy.

  • Insurers who overcharge for their policies will want to pay large commissions to brokers who can deliver new clients.  This leads to an inefficient “arms race” in marketing expenditures and commissions that increases costs for all insurers. 

  • A well designed public insurance option would make overcharging difficult and thus reduce inefficiencies from excess marketing.

Get The Article

Find the full article online

Search for Full Article