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Separating Selection and Incentive Effects in Health Insurance

  • Gardiol, Lucien
  • Geoffard, Pierre-Yves
  • Grandchamp, Chantal

This paper provides an analysis of the health insurance and health care consumption. A structural microeconomic model of joint demand for health insurance and health care is developed and estimated using full maximum likelihood method using Swiss insurance claims data for over 60,000 adult individuals. The estimation strategy relies on the institutional features of the Swiss system, in which each individual chooses among the same menu of contracts, ranked by the size of their deductible. The empirical analysis shows strong and robust evidence of selection effects. Nevertheless, once selection effects are controlled for, an important incentive effect ('ex-post moral hazard') remains. A decrease in the co-payment rate from 100% to 10% increases the marginal demand for health care by about 90% and from 100% to 0% by about 150%. The correlation between insurance coverage and health care expenditures may be decomposed into the two effects: 75% may be attributed to selection, and 25 % to incentive effects.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5380.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5380
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  1. Chiappori, Pierre-Andre & Durand, Franck & Geoffard, Pierre-Yves, 1998. "Moral hazard and the demand for physician services: First lessons from a French natural experiment," European Economic Review, Elsevier, vol. 42(3-5), pages 499-511, May.
  2. Pierre-André Chiappori & Bernard Salanié, 1997. "Testing for Asymmetric Information in Insurance Markets," Working Papers 97-11, Centre de Recherche en Economie et Statistique.
  3. Holly, Alberto & Gardiol, Lucien & Domenighetti, Gianfranco & Brigitte Bisig, 1998. "An econometric model of health care utilization and health insurance in Switzerland," European Economic Review, Elsevier, vol. 42(3-5), pages 513-522, May.
  4. David M. Cutler & Sarah J. Reber, 1998. "Paying For Health Insurance: The Trade-Off Between Competition And Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 433-466, May.
  5. 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 408-27, Autumn.
  6. Cameron, A C & 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, Wiley Blackwell, vol. 55(1), pages 85-106, January.
  7. Cutler, David M. & Zeckhauser, Richard J., 2000. "The anatomy of health insurance," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 11, pages 563-643 Elsevier.
  8. 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).
  9. Mullahy, John, 1998. "Much ado about two: reconsidering retransformation and the two-part model in health econometrics," Journal of Health Economics, Elsevier, vol. 17(3), pages 247-281, June.
  10. Eichner, Matthew J, 1998. "The Demand for Medical Care: What People Pay Does Matter," American Economic Review, American Economic Association, vol. 88(2), pages 117-21, May.
  11. Keeler, Emmett B & Newhouse, Joseph P & Phelps, C E, 1977. "Deductibles and the Demand for Medical Care Services: The Theory of a Consumer Facing a Variable Price Schedule under Uncertainty," Econometrica, Econometric Society, vol. 45(3), pages 641-55, April.
  12. Manning, Willard G., 1998. "The logged dependent variable, heteroscedasticity, and the retransformation problem," Journal of Health Economics, Elsevier, vol. 17(3), pages 283-295, June.
  13. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
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