This paper studies equilibrium and welfare in a class of regulated health insurance markets known as exchanges. We use detailed health plan choice and utilization data to model individual-level (i) projected health risk and (ii) risk preferences. We combine the estimated distributions of risk and risk preferences with a model of competitive insurance markets to predict allocations and prices under different counterfactual regulations and several equilibrium solution concepts. We investigate the welfare implications of different pricing regulations, with a focus on (i) adverse selection and (ii) premium re-classification risk. We find that market unravelling from adverse selection is substantial under the proposed pricing rules in the Affordable Care Act (ACA), implying limited coverage for individuals beyond the lowest tier (Bronze) health plan. Though adverse selection can be attenuated by allowing (partial) pricing of health status, the welfare loss from re-classification risk is substantially higher than the gains of increasing coverage. We compute the subsidies / tax penalties required to induce different levels of participation in the exchanges.

ABSTRACT In this paper I examine the effects that state policy decisions have had on the early impact of the Affordable Care Act (ACA) using data through the first half of 2014. I focus on the individual health insurance mar-ket, which includes plans purchased through exchanges as well as plans pur-chased directly from insurers. In this market, at least 13.2 million people were covered in the second quarter of 2014, representing an increase of at least 4.2 million beyond pre-ACA state-level trends. I use data on coverage, pre-miums, and costs and a model developed by Martin Hackmann, Jonathan Kolstad, and myself (forthcoming) to calculate changes in selection and mark-ups, which allow me to estimate the welfare impact of the ACA on participants in the individual health insurance market in each state. I then focus on com-parisons across groups of states. The estimates from my model imply that mar-ket participants in the five “direct enforcement ” states—those that ceded all enforcement of the ACA to the federal government—are experiencing welfare losses of approximately $245 per participant on an annualized basis, relative to

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This paper is the first chapter of my MIT dissertation. I am indebted to Amy Finkelstein, Nancy Rose, Jonathan Gruber, and Stephen Ryan for their guidance and support throughout this project. I thank

Keith Brand, and numerous seminar participants for helpful comments. We thank the Federal Trade Commission for providing us with access to the data. Gowrisankaran acknowledges funding from the Center for Management Innovations in Health Care at the University of Arizona. The views expressed here are the authors alone and do not necessarily reflect the views of the Federal Trade Commission, any Commissioner, or the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at