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  5. Do Ordeals Work for Selection Markets? Evidence from Health Insurance Auto-Enrollment

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Do Ordeals Work for Selection Markets? Evidence from Health Insurance Auto-Enrollment

  • Mark Shepard
  • Myles Wagner
American Economic Review (Forthcoming)

Abstract

Are application hassles, or “ordeals,” an effective way to limit public program enrollment? We provide new evidence by studying (removal of) an auto-enrollment policy for health insurance, adding an extra step to enroll. This minor ordeal has a major impact, reducing enrollment by 33% and differentially excluding young, healthy, and economically disadvantaged people. Using a simple model, we show that adverse selection – a classic feature of insurance markets – undermines ordeals’ standard rationale of excluding low-value individuals, since they are also low-cost and may not be inefficient. Our analysis illustrates why ordeals targeting is unlikely to work well in selection markets.

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