One pool to insure them all? Age, risk and the price(s) of medical insurance

- Asymmetric information protects consumers from reclassification risk.
- This insurance against reclassification risk mitigates the cost of adverse selection.
- Asymmetric information also generates transfers across and within groups.
- Transfers across groups may be essential for insurance within some groups.

Asymmetric information can lead to adverse selection and market failure. In a dynamic setting, asymmetric information also limits reclassification risk. This certainty offsets the costs of adverse selection. Using a dynamic model of endogenous insurance choice and price calibrated to the U.S. medical insurance market, I find that asymmetric information is Pareto improving when information is fully asymmetric. However, when insurers can discriminate by age group, but not within age groups, the young benefit by paying less for insurance. The insurance market for the near elderly collapses because it is no longer implicitly subsidized by the participation of the young.