Reducing Reclassification Risk in Health Insurance Through Long-Term Contracts

Reclassification risk presents a significant challenge in health insurance due to the typical one-year contract length, while health conditions often extend beyond this period. The study explores long-term insurance contracts with one-sided insurer commitment as a viable alternative to traditional pricing regulations, aiming to reduce reclassification risk without adverse selection. Theoretical characterization of these optimal contracts enables an algorithmic approach to compute them from market data.