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Testing for adverse selection into private medical insurance

  • Pau Olivella

    (Institute for Fiscal Studies)

  • Marcos Vera-Hernandez

    ()

    (Institute for Fiscal Studies and University College London)

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.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W06/02.

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Length: 48 pp.
Date of creation: 19 Jan 2006
Date of revision:
Handle: RePEc:ifs:ifsewp:06/02
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  1. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
  2. Propper, Carol & Rees, Hedley & Green, Katherine, 2001. "The Demand for Private Medical Insurance in the UK: A Cohort Analysis," Economic Journal, Royal Economic Society, vol. 111(471), pages C180-200, May.
  3. John Cawley & Tomas Philipson, 1997. "An Empirical Examination of Information Barriers to Trade inInsurance," University of Chicago - George G. Stigler Center for Study of Economy and State 132, Chicago - Center for Study of Economy and State.
  4. Jean Pinquet & Pierre-André Chiappori & Jaap Abbring & James J Heckman, 2003. "Adverse selection and moral hazard in insurance: can dynamic data help to distinguish?," Post-Print hal-00397115, HAL.
  5. Chiappori, Pierre-Andre & Salanie, Bernard, 1997. "Empirical contract theory: The case of insurance data," European Economic Review, Elsevier, vol. 41(3-5), pages 943-950, April.
  6. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
  7. 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.
  8. Besley, Timothy & Coate, Stephen, 1991. "Public Provision of Private Goods and the Redistribution of Income," American Economic Review, American Economic Association, vol. 81(4), pages 979-84, September.
  9. Pierre-André Chiappori & Bernard Salanié, 1997. "Testing for Asymmetric Information in Insurance Markets," Working Papers 97-11, Centre de Recherche en Economie et Statistique.
  10. Tim Besley & John Hall & Ian Preston, 1996. "The demand for private health insurance: do waiting lists matter?," IFS Working Papers W96/07, Institute for Fiscal Studies.
  11. 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 122-26, May.
  12. Martin Schellhorn, 2001. "The effect of variable health insurance deductibles on the demand for physician visits," Health Economics, John Wiley & Sons, Ltd., vol. 10(5), pages 441-456.
  13. Pierre-André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory : A Survey of Some Recent Work," Working Papers 2002-11, Centre de Recherche en Economie et Statistique.
  14. Gardiol, Lucien & Geoffard, Pierre-Yves & Grandchamp, Chantal, 2005. "Separating Selection and Incentive Effects in Health Insurance," CEPR Discussion Papers 5380, C.E.P.R. Discussion Papers.
  15. Carol Propper & Alan Maynard, 1989. "The market for private health care and the demand for private insurance in Britain," Working Papers 053chedp, Centre for Health Economics, University of York.
  16. 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.
  17. Gouveia, Miguel, 1997. "Majority Rule and the Public Provision of a Private Good," Public Choice, Springer, vol. 93(3-4), pages 221-44, December.
  18. Besley, Timothy & Hall, John & Preston, Ian, 1998. "Private and public health insurance in the UK," European Economic Review, Elsevier, vol. 42(3-5), pages 491-497, May.
  19. B. Dahlby, 1981. "Adverse selection and Pareto improvements through compulsory insurance," Public Choice, Springer, vol. 37(3), pages 547-558, January.
  20. Ángel Marcos Vera-Hernández, 1999. "Duplicate coverage and demand for health care. The case of Catalonia," Health Economics, John Wiley & Sons, Ltd., vol. 8(7), pages 579-598.
  21. Roger Feldman & Carlos Escribano & Laura Pellisé, 1998. "The role of government in health insurance markets with adverse selection," Health Economics, John Wiley & Sons, Ltd., vol. 7(8), pages 659-670.
  22. Sophia Delipalla & Owen O'Donnell, 1999. "The Political Economy of a Publicly Provided Private Good with Adverse Selection," Studies in Economics 9911, School of Economics, University of Kent.
  23. 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.
  24. repec:rus:hseeco:16303 is not listed on IDEAS
  25. 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.
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