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Consumer information and biased selection in the demand for coverage supplementing medicare

Author

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  • Davidson, Bruce N.
  • Sofaer, Shoshanna
  • Gertler, Paul

Abstract

This study examines how the relationship between health insurance knowledge and the health status of health insurance consumers influences their decisions to purchase insurance coverage. Data from the federal Medicare health insurance program for the elderly in the United States are used. The basic Medicare program provides a limited amount of coverage for health care services obtained from any provider in the private fee-for-service (FFS) market. Beneficiaries of this program may choose to supplement the basic coverage which they receive by two mechanisms: either they may purchase private insurance designed to fill some of the gaps left by the federal program ('Medigap' policies), thereby remaining in the FFS market and preserving their choice of provider, or they may enroll in health maintenance organizations (HMOs), thereby leaving the FFS market and agreeing to use only those providers affiliated with the HMO, and in return receiving broader coverage at little additional out-of-pocket cost. The study was made possible by a unique data set which combines measures of beneficiary knowledge of Medicare coverage with measures of perceived health status, socio-economic characteristics, and insurance coverage choices for a sample of Medicare beneficiaries who participated in an educational workshop about their insurance coverage options. These data were used to estimate a multinomial logistic model of the determinants of insurance choices, where the options included the two listed above and a basic Medicare option. The study explicitly recognized the interaction between insurance information and health status in health plan choice. These results show that knowledge of coverage does have a differential impact on the decision to purchase health insurance depending on health status. With a high level of knowledge, sicker beneficiaries are likely to have basic Medicare alone, compared with HMOs or Medigap policies, while healthier beneficiaries are less likely to be enrolled in HMOs, compared with Medigap policies. This finding has important implications for the use of health status measures to adjust capitated payment formulas when knowledgable consumers have the option to enroll in HMOs or remain in the FFS environment. In the absence of health status adjusters for the HMO capitation payments, high levels of coverage knowledge may exacerbate inherent selection bias among these coverage options by healthier and sicker consumers of health insurance.

Suggested Citation

  • Davidson, Bruce N. & Sofaer, Shoshanna & Gertler, Paul, 1992. "Consumer information and biased selection in the demand for coverage supplementing medicare," Social Science & Medicine, Elsevier, vol. 34(9), pages 1023-1034, May.
  • Handle: RePEc:eee:socmed:v:34:y:1992:i:9:p:1023-1034
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    Citations

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    Cited by:

    1. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    2. Keane, Michael, 2004. "Modeling Health Insurance Choices in “Competitive” Markets," MPRA Paper 55198, University Library of Munich, Germany.
    3. Paul Gertler & Roland Sturm & Bruce Davidson, 1994. "Information and the Demand for Supplemental Medicare Insurance," NBER Working Papers 4700, National Bureau of Economic Research, Inc.
    4. Michael P. Keane & Susan Thorp, 2016. "Complex Decision Making: The Roles of Cognitive Limitations, Cognitive Decline and Ageing," Economics Papers 2016-W10, Economics Group, Nuffield College, University of Oxford.
    5. repec:eee:hapoch:v1_661 is not listed on IDEAS
    6. Ettner, Susan L., 1997. "Adverse selection and the purchase of Medigap insurance by the elderly," Journal of Health Economics, Elsevier, vol. 16(5), pages 543-562, October.
    7. Amir Shmueli, 2001. "The effect of health on acute care supplemental insurance ownership: an empirical analysis," Health Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 341-350.

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