Utilization and Selection in an Ancillaries Health Insurance Market

I study two important aspects of the Australian private ancillaries health insurance (PAHI) market—moral hazard and self‐selection. PAHI covers out‐of‐hospital health services including dental, optometry, physiotherapy, and chiropractic. Using instrumental variables methods, I find evidence that PAHI increases utilization, particularly for dental, physiotherapy, chiropractic, osteopathy, and acupuncture. I also find evidence of selection effects—both adverse and favorable. Several variables jointly predict a person's propensity to insure and to utilize health services. There is little evidence of self‐selection based on the joint probability of different health services, which has important implications for understanding the commercial success of PAHI.