Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts

TLDR

The study investigates how much low‑income adults are willing to pay for health insurance and the implications for insurance markets. The paper explores explanations for the findings and their normative implications. The authors use Massachusetts exchange administrative data and subsidy discontinuities to estimate low‑income adults’ willingness to pay and insurance costs. Insurance take‑up falls sharply as subsidies shrink, with a 25% drop per $40 premium increase, and even generous subsidies leave many uninsured because low‑income adults’ willingness to pay is below half their expected costs, indicating adverse selection.

Abstract

How much are low- income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts’ subsidized insurance exchange, we exploit discontinuities in the subsidy schedule to estimate willingness to pay and costs of insurance among low- income adults. As subsidies decline, insurance take- up falls rapidly, dropping about 25 percent for each $40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower- cost, indicating adverse selection into insurance. But across the entire distribution we can observe (approximately the bottom 70 percent of the willingness to pay distribution) enrollees’ willingness to pay is always less than half of their own expected costs that they impose on the insurer. As a result, we estimate that take- up will be highly incomplete even with generous subsidies. If enrollee premiums were 25 percent of insurers’ average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10 percent of average costs would still leave at least 20 percent uninsured. We briefly consider potential explanations for these findings and their normative implications.