Testing for Asymmetric Information in Private Health Insurance

Abstract

We test for asymmetric information in the UK private health insurance (PHI) market. In contrast to earlier research that considers either a purely private system or one where private insurance is complementary to public insurance, PHI is substitutive of the public system in the UK. Using a theoretical model of competition among insurers incorporating this characteristic, we link the type of selection (adverse or propitious) with the existence of risk-related information asymmetries. Using the British Household Panel Survey, we find evidence that adverse selection is present in the PHI market, which leads us to conclude that such information asymmetries exist.The extent to which individuals have privileged information on their own risks (ex-ante asymmetric information) is important because it is one of the main justifications for public intervention in insurance markets (Dahlby, 1981). Indeed, individuals who know that their risk of falling ill is low will have a low willingness to pay for health insurance.This might lead to the well-known problem of adverse selection, which results in lower risk individuals enjoying less than full insurance.

Incentive and selection effects of Medigap insurance on inpatient care

“…Although the presence of an incentive effect -usually called ex-post moral hazard -is very well known by the theoretical literature on contract theory (Arrow, 1963;Pauly, 1968;Zweifel and Manning, 2000), its empirical relevance is still debated in the literature see Abbring et al (2003a,b), Buchmueller et al (2004), Cardon and Hendel (2001), Cohen (2005), Schellhorn (2001), and Cohen and Spiegelman (2010) for a review. A major difficulty in estimating the presence of moral hazard in Medigap insurance is the existence of self-selection, since individuals who expect high health care costs may choose a more generous coverage and then ex-post purchase more services.…”

Risk Selection under Public Health Insurance with Opt‐Out

“…Recent studies have capitalised on this result and related findings to test for adverse selection in health insurance (Olivella andVera-Hernández 2013, de la Mata et al 2014). 9 X contains disability status, an indicator of chronic illness, the number of hospitalisations within the last five years, doctor visits per quarter within the last three years, an indicator of body mass index (BMI)…”

“…As in Olivella and Vera-Hernández (2013), a public insurance plan coexists along with private insurance. Individuals must choose exactly one insurance policy, be it public or private.…”

Hips and hearts: The variation in incentive effects of insurance across hospital procedures

“…See Finkelstein and McGarry (2006), Cohen and Einav (2007), Fang et al (2008) and Olivella and Vera-Hernndez (2013) for examples and Cohen and Siegelman (2010) for a survey. Interest in this liter-ature was sparked by findings of advantageous selection in particular insurance markets.…”