Bundling Economics Under Adverse Selection in the Individual Health Insurance Market

We examine the impact of bundling strategies on the level of consumer participation and premium rates realized in an individual health insurance market characterized by an adverse selection problem. In this context we show that society may use private insurers to attain universal coverage at equitable premiums under a pure bundling strategy, where insurers offer only a comprehensive policy to the market. This result is strengthened as the number of medical conditions covered in the comprehensive policy increases and as applicant risk aversion increases. When insurance applicants exhibit low levels of risk aversion a mixed bundling strategy (or offering single-disease policies along with the comprehensive policy) improves consumer participation and decreases premium rates when compared to a pure bundling strategy. In this case market performance is improved by increasing policy options offered to applicants. Alternatively, when insurance applicants exhibit moderate levels of risk aversion a mixed bundling strategy reduces consumer participation and increases premium rates when compared to a pure bundling strategy. In this case market performance is improved by reducing policy options offered to applicants. In addition, when insurance applicants exhibit sufficiently high levels of risk aversion the consumer participation and premium rates realized under a pure bundling strategy and mixed bundling strategy converge toward full market participation. Finally, under all levels of risk aversion we show that offering an exclusion policy along with the comprehensive policy decreases consumer participation