Selection on Moral Hazard in Health Insurance

Abstract

We use employee-level panel data from a single firm to explore the possibility that individuals may select insurance coverage in part based on their anticipated behavioral (“moral hazard”) response to insurance, a phenomenon we label “selection on moral hazard.” Using a model of plan choice and medical utilization, we present evidence of heterogeneous moral hazard as well as selection on it, and explore some of its implications. For example, we show that, at least in our context, abstracting from selection on moral hazard could lead to over-estimates of the spending reduction associated with introducing a high-deductible health insurance option.

The effects of access to health insurance: Evidence from a regression discontinuity design in Peru

“…Chiappori and Salanié (2000), Abbring et al (2003a), and Abbring et al (2003b) investigate moral hazard in the market for car insurance. Finkelstein and Poterba (2004), Bajari et al (2006), Fang et al (2006), Aron-Dine et al (2015) and Einav et al (2013) study adverse selection and moral hazard in the context of health insurance in developed countries. Einav et al (2013) study the interrelation between adverse selection and moral hazard and term it "selection on moral hazard".…”

“…Finkelstein and Poterba (2004), Bajari et al (2006), Fang et al (2006), Aron-Dine et al (2015) and Einav et al (2013) study adverse selection and moral hazard in the context of health insurance in developed countries. Einav et al (2013) study the interrelation between adverse selection and moral hazard and term it "selection on moral hazard". 28 Das et al (2008) provide evidence pointing towards such low quality advice, at least in other low-income countries.…”

Sales Force and Competition in Financial Product Markets: The Case of Mexico's Social Security Privatization

“…In addition, if plan or product choice causes subsequent usage, perfect foresight costs may be endogenous (see, for example, Miravete (2003), Heiss, McFadden, and Winter (2010), Abaluck andGruber (2011), Handel (2013), Einav, Finkelstein, Ryan, Schrimpf, and Cullen (2013), Grubb and Osborne (2012), and Jiang (2012), Duarte and Hastings (2012)). A priori, fund manager choice is much less like likely to cause future labor force participation than health care plan choice is likely to cause subsequent use of different health services or a cell phone plan is likely to cause calling behavior.…”

Social Insurance: Connecting Theory to Data

“…12 For instance, papers that model realized utility directly as a function of individual primitives such as risk aversion and beliefs about risk type are able in principle to analyze choice and welfare over contracts that vary over dimensions over which one observes no heterogeneity in the data. The papers by Cardon and Hendel (2001), Cohen and Einav (2007), Einav, Finkelstein, and Schrimpf (2010), and Einav, Finkelstein, Ryan, Schrimpf, and Cullen (2011) are examples in this vein.…”

“…The empirical estimates of the welfare cost of selection have consistently tended to be a few percent of premia, bounding the potential welfare gains from policy interventions that aim to address selection at relatively low levels. This is true both in the insurance markets for acute medical expenses (see e.g., Cutler and Reber 1998, Carlin and Town 2010, Einav, Finkelstein and Cullen 2010, Einav, Finkelstein, Ryan, Schrimpf and Cullen 2011, Handel 2011, Lustig 2011 as well as annuity markets (Einav, Finkelstein and Schrimpf 2010). However, as emphasized above and as we return to below, virtually all of these papers have studied only the welfare cost of selection arising from ine¢ cient pricing of a given set of contracts, and have not investigated the potentially much larger welfare losses arising from selection limiting the set of contracts o¤ered or, in the extreme, causing a market to unravel completely.…”