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Testing for Asymmetric Information in Private Health Insurance

Author

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  • Pau Olivella
  • Marcos Vera-Hernández

Abstract

We develop a test for adverse selection and use it to examine private health insurance markets. In contrast to earlier papers that consider a purely private system or a system in which private insurance supplements a public system, we focus our attention on a system where privately funded health care is substitutive of the publicly funded one. Using a model of competition among insurers, we generate predictions about the correlation between risk and the probability of taking private insurance under both symmetric information and adverse selection. These predictions constitute the basis for our adverse selection test. The theoretical model is also useful to conclude that the setting that we focus on is especially attractive to test for adverse selection. Using the British Household Panel Survey, we find evidence that adverse selection is present in this market.

Suggested Citation

  • Pau Olivella & Marcos Vera-Hernández, 2006. "Testing for Asymmetric Information in Private Health Insurance," Working Papers 246, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:246
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    File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/246.pdf
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    References listed on IDEAS

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    1. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    2. Lucien Gardiol & Pierre-Yves Geoffard & Chantal Grandchamp, 2003. "Separating Selection and Incentive Effects: an Econometric Study of Swiss Health Insurance Claims Data," DELTA Working Papers 2003-27, DELTA (Ecole normale supérieure).
    3. A. C. Cameron & P. K. Trivedi & Frank Milne & J. Piggott, 1988. "A Microeconometric Model of the Demand for Health Care and Health Insurance in Australia," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 85-106.
    4. Propper, Carol, 1993. "Constrained choice sets in the U.K. demand for private medical insurance," Journal of Public Economics, Elsevier, vol. 51(3), pages 287-307, July.
    5. 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.
    6. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05.
    7. Coulson, N Edward, et al, 1995. "Estimating the Moral-Hazard Effect of Supplemental Medical Insurance in the Demand for Prescription Drugs by the Elderly," American Economic Review, American Economic Association, vol. 85(2), pages 122-126, May.
    8. Miguel Gouveia, 1997. "Majority rule and the public provision of a private good," Public Choice, Springer, vol. 93(3), pages 221-244, December.
    9. Blomquist, Soren & Christiansen, Vidar, 1998. "Topping Up or Opting Out? The Optimal Design of Public Provision Schemes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 399-411, May.
    10. Propper, Carol, 2000. "The demand for private health care in the UK," Journal of Health Economics, Elsevier, vol. 19(6), pages 855-876, November.
    11. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 408-427, Autumn.
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    Citations

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    Cited by:

    1. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
    2. Dardanoni, Valentino & Li Donni, Paolo, 2012. "Incentive and selection effects of Medigap insurance on inpatient care," Journal of Health Economics, Elsevier, vol. 31(3), pages 457-470.
    3. Pau Olivella & Fred Schroyen, 2014. "Multidimensional Screening in a Monopolistic Insurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(1), pages 90-130, March.
    4. Doiron, Denise & Fiebig, Denzil G. & Suziedelyte, Agne, 2014. "Hips and hearts: The variation in incentive effects of insurance across hospital procedures," Journal of Health Economics, Elsevier, vol. 37(C), pages 81-97.

    More about this item

    Keywords

    Contract theory; Testing; Health Insurance;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I19 - Health, Education, and Welfare - - Health - - - Other
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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