Advertising in Health Insurance Markets

<jats:p> The effects of television advertising in the market for health insurance are of distinct interest to both firms and regulators. Regulators are concerned about firms potentially using ads to “cream skim,” or attract an advantageous risk pool, as well as the potential for firms to use misinformation to take advantage of the elderly. Firms are interested in using advertising to acquire potentially highly profitable seniors. Meanwhile, health insurance is a useful setting to study the mechanisms through which advertising could work. Using the discontinuity in advertising exposure created by the borders of television markets, this study estimates the effects of advertising on consumer choice in health insurance. Television advertising has a small effect on brand enrollments, making advertising a relatively expensive means of acquiring customers. Heterogeneous effects point to advertising being more effective in less healthy counties, which runs opposite to the concern of cream skimming. Leveraging the unilateral cessation of advertising by United-Healthcare, evidence is provided that the small advertising effect is not explained by a prisoner’s dilemma equilibrium. An analysis of longer-run effects of advertising shows that advertising effects are short lived, further decreasing the potential of advertising to create long-run value to the firm. </jats:p>