Pursuing Affordability, Fairness, and Efficiency in the U.S. Commercial Health Insurance Market

The high cost of health insurance and health care services in the US is affecting not only the uninsured and lower income households, but is beginning to reach into the middle class. Current health insurance benefit designs often fail to address two forms of market failure: poor consumer information and distorted prices. These market failures distort the market for health care services, and contribute to unaffordable health insurance. When combined with the pooling function of health insurance, those sources of market failure also result in income redistributions that arguably are unfair. Using data from the 2019-2022 Medical Expenditure Panel Survey, we provide a detailed analysis of the population experiencing affordability problems. We then explain how existing health insurance benefit designs fail to address those sources of market failure. Finally, we describe a novel benefit design that improves information by telling consumers where to find providers with lower total cost of care and reduces price distortions by sharing the savings with consumers who choose lower cost providers. These steps improve the efficiency of the health care services market and reduce interpersonal subsidies of consumers who prefer higher cost providers.