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Adverse Selection, Moral Hazard and the Demand for Medigap Insurance

  • Michael P. Keane

    ()

    (Nuffield College, University of Oxford)

  • Olena Stavrunova

    ()

    (University of Technology, Sydney, Australia)

The size of adverse selection and moral hazard e ects in health insurance markets has important policy implications. For example, if adverse selection e ects are small while moral hazard e ects are large, conventional remedies for ineciencies created by adverse selection (e.g., mandatory insurance enrolment) may lead to substantial increases in health care spending. Unfortunately, there is no consensus on the magnitudes of adverse selection vs. moral hazard. This paper sheds new light on this important topic by studying the US Medigap (supplemental) health insurance market. While both adverse selection and moral hazard e ects of Medigap have been studied separately, this is the rst paper to estimate both in an uni ed econometric framework. We develop an econometric model of insurance demand and health care expenditure, where adverse selection is measured by sensitivity of insurance demand to expected expenditure. The model allows for correlation between unobserved determinants of expenditure and insurance demand, and for heterogeneity in the size of moral hazard e ects. Inference relies on an MCMC algorithm with data augmentation. Our results suggest there is adverse selection into Medigap, but the e ect is small. A one standard deviation increase in expenditure risk raises the probability of insurance purchase by 0.037. In contrast, our estimate of the moral hazard e ect is much larger. On average, Medigap coverage increases health care expenditure by 32%.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2012/PaperNovember2011.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2012-W10.

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Length: 79 pages
Date of creation: 23 Oct 2012
Date of revision:
Handle: RePEc:nuf:econwp:1210
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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