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Discussion Paper

Optimal Long-Term Health Insurance Contracts: Characterization, Computation, and Welfare Effects

Reclassification risk is a major concern in health insurance where contracts are typically one year in length but health shocks often persist for much longer. While most health systems with private insurers emphasize short-run contracts paired with substantial pricing regulations to reduce reclassification risk, long-term contracts with one-sided insurer commitment have significant potential to reduce reclassification risk without the negative side effects of price regulation, such as adverse selection.