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Disentangling Adverse Selection, Moral Hazard and Supply Induced Demand: An Empirical Analysis of The Demand For Healthcare Services

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Abstract

In the healthcare sector, Selection (S), Moral Hazard (MH) and Supply Induced Demand (SID) are three very important phenomena affecting patients' behavior. Despite there exists a vast theoretical and empirical literature on these phenomena, so far, no contribution has been able to approach them jointly. This is mostly due to difficulties in modelling the joint determinants of health service utilization and health insurance choice by means of a tractable structural simultaneous equation model. In this paper, we provide a solution to this problem and estimate a simultaneous four equation structural model with four latent variables, where the first two equations are meant to deal with the adverse selection issue, while the third and fourth equation deal with moral hazard and SID issues. By doing so, our model seeks to identify causal effects while correcting for selection and endogeneity with the observational data we have. A closed form solution for the likelihood function - which guarantees an exact solution - is maximized via FIML, using a large cross-sectional dataset collected by the Italian national institute of statistic (ISTAT). The empirical analysis has confirmed the theoretical predictions of our structural model. In particular, we find evidence of selection in the choice of private insurance and SID, but do not find MH behavior on the patient side. These results are extremely important from a health policy perspective, given the existing international debate on the development of a second pillar in the financing of the healthcare system.

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  • Vincenzo Atella & Alberto Holly & Alessandro Mistretta, 2016. "Disentangling Adverse Selection, Moral Hazard and Supply Induced Demand: An Empirical Analysis of The Demand For Healthcare Services," CEIS Research Paper 389, Tor Vergata University, CEIS, revised 31 Oct 2018.
  • Handle: RePEc:rtv:ceisrp:389
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    1. Thomas C. Buchmueller & Agnès Couffinhal & Michel Grignon & Marc Perronnin, 2004. "Access to physician services: does supplemental insurance matter? Evidence from France," Health Economics, John Wiley & Sons, Ltd., vol. 13(7), pages 669-687.
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    3. Keane, Michael & Stavrunova, Olena, 2016. "Adverse selection, moral hazard and the demand for Medigap insurance," Journal of Econometrics, Elsevier, vol. 190(1), pages 62-78.
    4. Lorenzo Cappellari & Stephen P. Jenkins, 2006. "Calculation of multivariate normal probabilities by simulation, with applications to maximum simulated likelihood estimation," Stata Journal, StataCorp LP, vol. 6(2), pages 156-189, June.
    5. Keane, Michael P, 1994. "A Computationally Practical Simulation Estimator for Panel Data," Econometrica, Econometric Society, vol. 62(1), pages 95-116, January.
    6. Vincenzo Atella & Francesco Brindisi & Partha Deb & Furio C. Rosati, 2004. "Determinants of access to physician services in Italy: a latent class seemingly unrelated probit approach," Health Economics, John Wiley & Sons, Ltd., vol. 13(7), pages 657-668.
    7. 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.
    8. 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.
    9. 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).
    10. 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.
    11. 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.
    12. Atella, Vincenzo & Deb, Partha, 2008. "Are primary care physicians, public and private sector specialists substitutes or complements? Evidence from a simultaneous equations model for count data," Journal of Health Economics, Elsevier, vol. 27(3), pages 770-785, May.
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    14. 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.
    15. David Powell & Dana Goldman, 2016. "Disentangling Moral Hazard and Adverse Selection in Private Health Insurance," NBER Working Papers 21858, National Bureau of Economic Research, Inc.
    16. Keane, Michael & Stavrunova, Olena, 2016. "Adverse selection, moral hazard and the demand for Medigap insurance," Journal of Econometrics, Elsevier, vol. 190(1), pages 62-78.
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    More about this item

    Keywords

    Quadrivariate probit; FIML; Supply induced demand; Moral hazard; Adverse selection; Health insurance.;

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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